Brian Ford Analyzes the Week in Business.
Mixed signals: Good month on Wall Street, GDP flat, consumers not spending
Farrar: Brian Ford joins us now from RBC Wealth Management for his regular Monday morning analysis of business and financial news. Good morning, Brian. Welcome back.
Ford: Good morning, Wayne, and welcome to August.
Farrar: Yeah, boy, it's hard to believe the year's now 7/12ths gone. I don't know what to make of the economy, Brian.
Ford: You must be the only one, Wayne.
Farrar: Mixed signals, to say the least; I mean, there are a few good signs here and there, but it's hard to feel the effect. July was the best month in a year for stock market investors, but there are some other kinda rocky signs as well.
Ford: I think that's right. You know, it is true, May and June were very bad for stock investors, creating a lot of pessimism, and then July comes back with a very solid seven-percent gain, as you mentioned, the best in a year. That still leaves us a little down year-to-date, but the momentum is pretty decent right now; the indications are this week will get started off on a very strong foot. Maybe investors' moods were lightened somewhat because of the break in the heat, or maybe we were all able to fixate on Chelsea Clinton's big wedding this past weekend, but nonetheless, corporate earnings reports remain strong for the second quarter of 2010, up over forty percent year-over-year and that is much better than expected, and that's with about three-quarters of the reports in, so that's a pretty good statistical mean. However, there's a dirty little detail in there, Wayne, and that's sales, which is a sign of what we call "raw demand", was only up nine percent. I mean, clearly employers are making do with less expense, less overhead, and just not hiring yet. It's kind of a "good news, bad news" scenario.
Farrar: The GDP report was out at the end of last week. What does that mean?
Ford: Well, this has lots of implications, Wayne. The GDP, or what we call the gross domestic product, came out on Friday. It showed that the U.S. economy grew in the second quarter of 2010, but a little less than expected, up 2.4% was decent, but clearly a deceleration from the prior two quarters, which averaged about 4% or a little bit over that. Essentially, it's giving credence, more credence, to the white-knuckle crowd that fears that we are heading for a double-dip recession. Clearly the question is, has the recovery lost momentum. You just heard on NPR that even former Federal Reserve Chairman Allen Greenspan said yesterday on "Meet the Press" that he thought the U.S. economy was, quote, "touch and go", and that it feels like we're in a quasi-recession. Now that is not exactly a "pick-me-up" speech, so it's no wonder that individual investors are still pumping money into bonds, both of the government and corporate variety, and they're just not buying stocks as much. Some reports show that almost ninety percent of every new investment in mutual funds is going into bonds; now time will tell if that's a correct strategy, but I did see a very compelling report yesterday about consumer sentiment now. Essentially, it said that baby boomers, our largest demographic, they fear running out of money today more than they do dying. Let me say that again: baby boomers fear running out of money more today than they do dying. Wow! Now that is a stat to remember. Already the chorus of legislators on Capitol Hill are starting to debate seriously whether it's a good idea to let the tax cuts expire at the end of the year; it should be an interesting debate over the next few months.
Farrar: We have about two-and-a-half minutes to go. Consumer confidence is not picking up, that's another sign of concern.
Ford: Yeah, it really is, and Wayne, it kinda ping-pongs back and forth month to month, but this is a big story as always. You know and I know that historically, consumer spending has accounted for a very large part of our economic output, over two-thirds, historically, and while corporate spending on equipment and software is as strong as it's been in over ten years; but the latest GDP report showed that consumer spending was down, which concerns analysts. The silver lining is that the savings rate among U.S. consumers is back up to almost six percent, which is where it was twenty years ago, and that means consumers are continuing to deleverage, slowly but surely. We think it means that local governments such as our own are likely to continue offering deals like the tax-free weekend in Virginia, which is coming up this next weekend. Retailers are hoping for a robust back-to-school season, but it may just be that, it may be a hope.
Farrar: A little over a minute to go, and I want to call our listeners' attention to the fact that your Monday morning business news analyses are now available for repeat hearings, I guess one would say.
Ford: Yeah, Wayne, if I could, let me give a quick plug for our program. Many people tell me how much they enjoy our conversations on air; however, some people miss it because they're already at work or in the process of dropping kids off at school or daycare or whatever. There's good news on two fronts: all you need is a computer and access to the web and you can make sure not to miss us. Simply go to ideastations.org/radio and follow the links to either listen to a live stream on Monday mornings, or you can access previously-recorded programs via the archive.
Farrar: Right. Ideastations.org/radio/archive.
Ford: Now, Wayne, I have to admit it's a little intimidating to me because listeners can now hear what I said six months or a year ago, but that's an occupational hazard. I can't help that.
Farrar: Right. Archived in perpetuity.
Ford: The web address again, Wayne, is ideastations.org/radio.
Farrar: Forward slash, actually.
Ford: Forward slash, there you go.
Farrar: And then click on the archive or you can just slash again and type in archive. Great! Well, we're glad we now have your Monday morning analyses added to our archive page. I hope our listeners will be patient a little while after we get off the air this morning to get that posted, and I'll talk to you again next Monday morning.
Ford: Have a good day.
Farrar: Thanks to Brian Ford of RBC Wealth Management.