Is the current wave of risk aversion a speculative affair? No, not at all. There are fundamental drivers that are creating new headwinds for the economic recovery. At the core of the problem is the decline in inflation expectations. In a number of posts back in May we wondered if the then-nascent warning signs were simply noise. Three months later, it’s clear that the economy is struggling anew, and for reasons that won’t quickly fade.
Monthly Archives: August 2010
SATURDAY READING ROUNDUP: 8.14.2010
►Bank Loans: Still Contracting
Information from various sources suggests that the number of loans that banks are making to businesses continues to fall. The contraction appears to be driven by both supply and demand; banks are extending less credit, and businesses are asking for less. The restriction of credit may be one important factor that is constraining the current recovery, since businesses, especially small ones, rely on bank loans and access to credit to finance their operations, capital expenditures, and growth.
►In a sluggish economic summer, no easy fix ahead
“You can’t force people to take out a loan or spend money that they don’t want to spend,” says Alice Rivlin, who served as the Fed’s No. 2 official in the late 1990s.
A BIT OF GOOD NEWS IN RETAIL SALES, A.K.A. IT COULD HAVE BEEN WORSE
Retail sales posted a modest gain in July and consumer prices advanced as well, delivering some much-needed statistical counterpoints to the deflation-is-fate argument of late. But closer inspection of the numbers leaves plenty of room for debate about the economic outlook. Beggars, of course, can’t be choosy and so the numbers du jour are welcome if not exactly cause for celebration.
NEW JOBLESS CLAIMS TREND HIGHER
For months, it was treading water. That was bad enough. But now it’s rising, raising fears that it could go higher still. Today’s update on weekly jobless claims shows that new filings for unemployment benefits rose to 484,000 last week—the highest since February.
GROWTH & DEBT, THE CHICKEN & THE EGG
Is high debt a drag on economic growth? Or is a recession born of other catalysts the source for high debt? Inquiring minds want to know.
A QUICK REVIEW OF TARGET DATE FUNDS…
I recently wrote a short take on TDFs for BankRate.com. The moral of the story: these products may harbor more risk than it appears. You can read the story here.
BETTER LIVING WITH DERIVATIVES?
Yes, it’s possible. Unless the Dodd-Frank Wall Street Reform and Consumer Protection Act throws a wrench or two into the machine.
BENIGN NEGLECT
The Federal Reserve recognized that the economic recovery has slowed in recent months, according to the FOMC statement issued yesterday. The central bank also said that inflation has “trended lower in recent quarters” and that pricing pressures are likely to remain “subdued for some time.” What will the Fed do to a) help keep deflationary pressures from gaining strength and b) bolster growth? Two things, according to the FOMC announcement. One, it will keep Fed funds at a zero-to-25-basis-point target rate for an “extended period.” Two, it will invest the proceeds from its bloated mortgage and agency debt portfolio in longer-term Treasuries to help keep long rates low. The question, of course, is whether this will suffice to offset the downshift in economic momentum of recent months? No one really knows, but the argument that this is enough looks thin.
IS THE STREAK IN HIGH LABOR PRODUCTIVITY HISTORY?
If you were looking for one more reason to wonder about the already shaky prospects for a recovery in the labor market, today’s report on second-quarter worker productivity is just the ticket.
FED TALK
The Federal Open Market Committee meets tomorrow to discuss monetary policy at its regularly scheduled confab. No one expects a rate hike, of course, but the debate about how the central bank might do more with so-called quantitative easing has the crowd buzzing…
►Dow Jones:
Disappointing growth and stubbornly high unemployment is likely to leave Fed officials with the important task of deciding whether to further bump the economy with a debt-buying program, said James Hughes, a market analyst with CMC Markets. “Whether this happens is still very much up in the air, but the reaction by the major markets could well be an aggressive one. Markets could see the move as a good sign of officials seeing the problem and acting before its too late. On the other hand, a further sign of a stuttering economy could well spook the markets in to a bigger fall for equity markets,” said Hughes.
►Bloomberg News:
Treasury two-year yields approached an all-time low amid speculation that the Federal Reserve will resume bond purchases this week as it seeks to safeguard the U.S. economic recovery.