The U.S. economy had little to reveal over the course of this past week, nevertheless, the data released signaled that the economy is still walking down the path of recovery, as economic activity seems to be stabilizing from the worst recession since WWII, however financial markets were rather hectic, where investors were still focused on Europe’s debt problems, which continues to threaten the outlook for global recovery.
The start was with the consumer credit index, which signaled that purchases on credit increased in April after falling in March, which represents yet another sign that spending levels are improving, though the improvement remains restricted by elevated unemployment and tightened credit conditions.
Meanwhile, the wholesale inventories index released for the month of April, the index also signaled an ongoing improvement in inventory levels, where it seems that producers are starting to build their inventory levels amid the recent improvement in economic conditions, and that is providing further support to economic growth.
Also the Federal Reserve Bank released its Beige Book, where the Feds signaled that economic conditions improved in most districts, as the Feds believe that the economy will continue to expand over a modest rate, since elevated unemployment levels continue to weigh down on economic activity, while inflationary pressures were still subdued, and accordingly, the Feds still believe that promoting economic growth is the main priority.
Moreover, the U.S. Commerce Department signaled that the trade deficit widened in April, where the rising value of the dollar weighed down on exports, as the U.S. dollar has been gaining against most of its major counterparts over the past period, and that indeed affected American exports, while weak demand levels inside the United States continue to weigh down on imports as well.
As for the weekly jobless claims data, the initial jobless claims index declined slightly, while the continuing claims index continued to signal improvement, however, conditions in the labor market are still rather challenging, where unemployment is now standing near its highest level in more than 25 years at 9.7%, while the Feds expect unemployment to range between 9.1% and 9.5% by the end of this year, which is still relatively high, as it will continue to hammer economic activity through limiting income growth and accordingly spending levels, and since spending accounts for nearly two thirds of economic activity in the United States, we should expect growth to remain under pressure over the course of this year.
Another alarming issue is the budget deficit, where the U.S. government committed huge amounts of liquidity in order to support economic activity, where the budget deficit narrowed in the month of May to $135.9 billion from the prior reported deficit of $189.7 billion. The U.S. budget deficit represents another source of danger for the economy, as it could weigh down heavily on the U.S. dollar as well as push long term interest rates higher, and that will further restrain economic activity.
This was further demonstrated in the retail sales figures that were released on Friday, where the retail sales dropped opposite to expectations, as this might indeed signal that the economy will still struggle over the upcoming period, as it seems that the economy won’t be able to sustain the substantial growth levels reported over the past period.
The retail sales accounts for more than 50% of consumer spending and accordingly we should expect spending to contribute by a slower pace to economic growth over the upcoming period, since spending remains under pressure from elevated unemployment and tightened credit conditions.
Finally, the University of Michigan released its preliminary estimate for consumer confidence in the month of June, where consumer confidence continued to improve to reflect the improvement seen recently, especially in the labor market, as unemployment dropped to 9.7% from 9.9%, as employers added more than 400,000 jobs in May.
Meanwhile, stock and currency markets fluctuated heavily over the course of this past week, where investors were still worried over the outlook for global growth amid the European debt crisis, however, data from Asian supported confidence among investors, and that led the stock markets to fluctuate heavily, where the Dow Jones Industrial Average dropped below 10,000 for the first time since February, however the DJIA was still able to rise above the 10,000 mark, as this level has proven to be pivotal, since so long as trading remains above this level, we don’t expect a bearish wave to prevail for the time being.
Moreover, the U.S. dollar also fluctuated against major currencies over the course of the week, where the dollar received a huge boost earlier in the week amid the spread pessimism, however, the dollar weakened as confidence among investors improved, and that prompted the Euro to rise above the $1.20 levels, yet we generally believe that the U.S. dollar will be able to build on its gains over the upcoming period. Gold on the other hand rose to set a new record high above $1250 an ounce, while oil prices also rose back to trade near the $75 a barrel levels.
