The economic news lately has taken a turn for the worse. The unemployment rate is up, retail sales are down and consumer sentiment is headed in the same direction, there seems to be no bottom to the housing market and the Dow is is coming off of its worst week since last August. What gives?
To be sure, there is a group of economic forecasters that predict gl0om and doom ahead, but the majority of economists believe that much of what has dragged the economy down in the last couple of months is likely to be short lived. While there is alway a chance that something else will happen to throw the economy off course, most forecasters believe that the issues that have affected the economic recovery thus far will start to fade soon and the SLOW rebound will resume. The bigger issue is that the recovery has never really hit the gas pedal and has been slow to get going. Even when it gets back underway the progress will remain slow when it comes to issues like employment.
There are three reasons given by analysts for the current slow down:
- The sudden hike in the cost of key industrial commodities (oil, metals, etc.)
- The supply chain disruption that took place due to the Japanese earthquake
- The ongoing crisis in the European Union
The hike in the price of oil was steep and unexpected as it was brought on by political developments that were not anticipated. This onslaught hit the consumer hard and all but halted their spending. The latest retail numbers show the retail operations that did well were in the higher end catagories (Nordstrom’s, Nieman Marcus, Macy’s) while the discount operations (Wal-Mart) saw an increase in traffic but a reduction in the per person sale. What this tells us is that those most sensitive to the price of gas reduced their spending and those with higher incomes did little to reduce consumption. The implication is that consumer demand is still there and growing but remains sensitive to the higher prices paid at the pump and the grocery store as these costs decline (as they are expected to) it is assumed that consumers will feel more confident.
The supply chain disruption in Japan affected the U.S. manufacturing community in two ways. First there was the fact that needed parts did not arrive creating delays and cancellations in production. Secondly, Japanese companies that were affected by the catastrophe stopped importing which affected U.S. makes both directly and indirectly. Now that the Japanese are starting to recover, these disruptions have been minimized and things are starting to return to some sense of normalcy. U.S. manufacturing is expected to see a rebound in June but real growth may not start up again until the end of summer.
Thirdly, the crisis in Europe centers on the threat that Greece will default or investors will be forced into unfavorable restructuring. This could cause an expanded crisis in Spain and Italy. If this comes to past, the bailout will have failed and there is a possibility that the whole concept of the euro could unravel. This can only happen if the Germans and the IMF allow it to happen. Look for Germany and the IMF to eventually fight through the politics and announce further backing for these countries before the sky falls.
Throw in the fight in Washington over the budget deficit and raising of the debt ceiling and there are enough reasons for even the most positive thinking forecaster to give pause. What do you think?