Slowing Economy?

Here’s an update on the economy from one of our lending partners New York Community Bank

This past business week’s start and finish were both marked with local record lows in the most watched indicators of the financial market’s condition. On Monday, the S&P 500 dropped to its lowest level since mid-March and by the end of the week the Dow slipped under the 12,000 mark that brought back a “time-to-buy versus double-dip” puzzle. President Obama expressed concerns about the slowing economy, but assured the public that he was not worried about the possibility of a second round of recessionary climate. Federal Reserve Chairman, Ben Bernanke, at the same time, confirmed that economic growth had indeed faded, but there is not much more the Fed can do, other than what has already been done. Having spent a record amount of money in stability packages, the government considers stimulus exit strategies. It looks like the time has come for the “baby” economic growth to take off and find its own way as the government withdraws its support.

New jobless claims were released at a high level of 427,000, marking another week above 400,000, which indicates a serious slow-down in the job market as compared to the late winter – early spring period. State and local governments are looking to cut over 100,000 jobs in the third quarter, while total loss of public sector positions in the crisis are at 510,000 and counting. At the same time, local government borrowing surged recently to help fund municipal needs; investors, however, are cautious about the Muni-bonds market.

While former IMF leader, 62-year old Dominique Strauss-Kahn, until recent time a well-established French financier and politician, prepares to enter a non-guilty plea on the alleged sexual assault, the long awaited application for his former position arrived on Friday from Stanley Fischer, Head of Israel’s Central Bank since 2005. Mr. Fisher had previously held top positions at Citigroup Corp and World Bank. Although he received much support from various influential figures, his 2 years above the requirements age of 65 as well as non-European origin put him at disadvantage as compared to the primary candidate, French Finance Minister Christine Lagarde.

In the U.S. this week, the nominee for the Federal Reserve Governor, MIT Professor and economist Peter Diamond had to withdraw his candidacy after being repeatedly blocked by Republicans. Mr. Diamond, a Nobel Prize laureate for the work in the area of unemployment and the labor markets, wrote a commentary on his withdrawal published in the New York Times under the title, “When a Nobel Prize Isn’t Enough”.

Anxiety surrounding oil prices came back as gas tended to stay above the $4 a gallon range. This past Wednesday, OPEC members, after a meeting that ended in much disagreement, refused to raise output above the current 26.15 million barrels a day limit, which is already 1.3 million barrels a day above the previously agreed upon quota. However, by the end of the week, Saudi Arabia independently announced a ten percent production increase that will constitute 1.14 million barrels per day. Demand for oil at the present time exceeds supply by 1.45-1.81 million barrels daily according to different sources. Oil prices have eased somewhat after the announcement.

News of the highly anticipated Groupon’s IPO looks like one from over 10 years ago, when almost any internet company would be cheered with exuberance and washed with investors’ money. Have we really learned a dot-com boom lesson? Isolated voices of reason, suggesting that Groupon’s business model sustainability needs to be questioned and may be questionable, have drawn in a wave of enthusiasm.

Among other important reports released during the past week was the Beige Book, evidence of the economic condition compiled for the June Fed’s meeting by one the system’s banks. The Beige Book report confirmed the slow-down in the economy without reporting any signs of sharp disruption, though. International Trade on Thursday reported a shrinking trade deficit, which should be positive according to the classic economic view. But the trade deficit dropped, most likely, due to the decrease in imports of the components that affect U.S. domestic output; therefore there may be a hidden lagged hit on the already slow growth. Import and Export Prices, reported Friday, have grown a minimal 0.2 percent as compared to the previous readings; a drop in price inflation was largely attributed to the oil price decrease between April and May. The Treasury Budget Deficit in May came in well below expectations due to the one-time adjustment of the TARP costs posted in that month. Besides accounting technicalities, the tax inflows increase of 29 percent made positive news.

The upcoming week will keep investors busy watching the indicators of economic condition. On Tuesday, Producer Price Index, Retail Sales and Business Inventories are to be reported, Wednesday brings in a mix of readings – Consumer Price Index, Empire State Manufacturing Survey, Treasury International Capital, Industrial Production, Housing Market Index, EIA Petroleum Status Report; Housing Starts, Jobless Claims and Philadelphia Fed Survey will be released on Thursday; Friday, the Consumer Sentiment report will finalize the week.

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