New increases in government spending are deepening the economic damage that has already brought on a recession and roiled financial markets.
(I’m off to Europe next week in an attempt to get some first-hand information on how Europeans view our country. The timing of next week’s report may be affected by my travel schedule.)
The Week That Was
This week’s inflation news brought the relief many expected. Led by a steep decline in oil, the CPI was essentially unchanged in July. The core CPI (ex-food and energy) and producer prices for finished goods rose at a 4 percent annual rate. If oil prices continue to rebound in August, the relief from inflation could be short-lived.
For the immediate future, the extremely high inflation of previous months should continue to moderate. Even so, our expectation that spending has slowed to the 5 percent to 6 percent vicinity still produces an underlying inflation rate in that vicinity. We are still far from the Fed’s 2 percent goal for inflation.
Moreover, industry experts in the Meyers Report group see oil going back to $120-$125 a barrel in late September to mid-October because of supply shortages.
The upward trend in weekly initial unemployment claims might confirm a weakening in the economy. Through the first week in August, claims were 262,000, up from 247,000 in July. Unemployment claims have risen each month since hitting a low of 175,000 in March.
Things to Come
On Monday, Homebuilders will report on their assessment of new housing activity in early
August. The new home market has gone from readings above 80 early this year to 55 in July (50 is no growth). Data for June show nine months of inventory, a big negative for the new home market.
Tuesday, the Fed’s data on July manufacturing output can help clarify the mixed signals on the economy. The Fed’ index peaked in April and declined in May and June. Business surveys are mixed over whether manufacturing is increasing or decreasing.
July retail sales data on Wednesday will provide another economic gauge. The 12 percent decline in oil prices in July provides a reason to suspect retail sales data will show little increase, if any.
The Fed will release the minutes of its July meeting on Wednesday. These are unlikely to reveal anything new.
Market Forces
Stock prices were mostly higher this week.
Small cap ETFs rose 3 percent, the S&P500 and Dow increased 1.5 percent, and Nasdaq and QQQs were mostly unchanged.
Technical indicators remain slightly positive. However, the gains in the S&P500 are still happening on low average trading volume. This is not characteristic of a healthy market.
Economic news was mixed. July’s inflation numbers were lower than expected, but the nation’s productivity in the first half was down 3 percent. Productivity is the economy’s lifeblood, indicating underlying strength or weakness. The 3 percent decline was the worst ever recorded since the data began in 1947.
The decline followed the fourth quarter passage of Build Back Better legislation. The bill shifted $100 billion a year from the productive private sector to government for the next 10 years. Additional new legislation (the Chips for America Act and the Reduce Inflation Act) will shift another $100 plus billion a year for the next 10 years, resulting in even lower productivity to come.
After hitting a low of 2.6 percent on August 1st, the yield on 10-year T-Notes moved erratically higher to 2.9 percent. If the upward move in long-term rates continues, stocks will suffer.
A recent Meyers Report roundtable discussion among a broad group of industry experts identified a growing weakness throughout all sectors of the economy. Government policies that weaken productivity make it more difficult to contain inflation. They are bad for business and for stocks.
Outlook
Economic Fundamentals: weak
Stock Valuation: S&P 500 overvalued by 26 percent
Monetary Policy: restrictive
For more from Robert Genetski.
More on recession.
For more Budget & Tax News.
For more from The Heartland Institute.