The following is an excerpt from my November “Moving Markets” newsletter. If you’d like a complimentary subscription click here: www.usawealthmanagement.com.
After this was written, the Federal Reserve predictably left interest rates unchanged.
The following excerpt was taken from an AP story on November 4, 2009 (emphasis mine):
Faced with lurking dangers to the budding recovery, Federal Reserve policymakers are sure to leave a key interest rate at a record low to entice Americans to spend more and help the economic turnaround gain traction.
The economy started to grow again last quarter for the first time in more than a year, although there are uncertainties about the strength and staying power of the recovery, especially after government supports are removed.
Fed Chairman Ben Bernanke and his colleagues resumed meeting Wednesday morning and are likely to note the country’s economic and financial improvements when they wrap up their two-day session in the afternoon. But they’ll also warn that rising joblessness and hard-to-get-credit for many people and companies will restrain the rebound in the months ahead. Troubles in the commercial real estate market, where soured loans are contributing to bank failures, also remain a concern.
At its last meeting in late September, the Fed opted to stretch out into early next year a key program aimed at forcing down mortgage rates and providing support to the housing market. The central bank isn’t expected to veer from that course Wednesday.
Wanting to nurture the recovery, the Fed is widely expected to keep the target range for its bank lending rate at zero to 0.25 percent. If it does, commercial banks’ prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will stay at about 3.25 percent, the lowest in decades.
“I don’t think there is confidence at this point that the economy is firing on all cylinders by itself,” said Bill Cheney, chief economist at John Hancock Financial Services. “It is not ready to be weaned off the extra fiscal and monetary support.”
Against that backdrop, many economists predict the Fed will maintain a pledge to keep rates “exceptionally low” for an “extended period.” The hope is that super-low rates will spur consumers and businesses to spend more, supporting the recovery.
The health of the US Economy is heavily dependent upon consumer spending levels. Yet, the unemployment rate is still near record levels. Until this fact changes, the pool of consumers that are able to spend and contribute to the economy’s recovery is diminished and may even be shrinking. This from the jobless claims report for the week of 10/24/2009 (highlighting is once again mine):
Jobless claims are not offering a clear indication of what to expect for the October employment report. Initial claims held steady for a fourth straight week, edging 1,000 lower to 530,000 in an Oct. 24 week that was not skewed by special factors. The four-week average is at 526,250 and does show improvement, down about 20,000 vs. this time last month. Continuing claims, where the latest data is for the Oct. 17 week, fell substantially, down 148,000 to 5.797 million and, for the first time since April, bringing the four-week average below 6 million at 5.961 million. But the improvement reflects an uncertain mix of hiring together with the expiration of benefits.
In other words, even though continuing unemployment claims are down, we’re not sure if people are actually getting hired or if their benefits have simply expired. With the national unemployment rate now reaching 9.8% and the new employment numbers expected to be released shortly after this issue goes to press, a 9.9% unemployment rate is likely and 10% unfortunately is within reach.
Additionally the Conference Board’s newspaper Help Wanted Advertising Index reached a 58 year low last month. Well it is true most help wanted ads are now published online contributing to this finding, the Conference Board’s online Help Wanted Advertising Index also declined. When the online index is reviewed, an annual decline of 24.6% from October of 2008 to October of 2009 occurred.
The bottom line is this – unemployed people don’t spend money on a discretionary basis – my take is that means a slow recovery at best.
Securities offered through USA Advanced Planners (Member FINRA/SIPC). Advisory services offered through USA Wealth Management. USA Advanced Planners and USA Wealth Management are affiliated companies. The opinions expressed herein are those of the writer and not necessarily that of the above noted affiliated companies. This update may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. The information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed.
This information is education in nature and, therefore, is not intended to constitute investment advice and should not be interpreted as a recommendation to purchase, sell or hold a particular security. Prior to making any investment decision, the services of an appropriate professional should be sought as investment related recommendations are dependent upon the personal situation of each individual investor. Investing in market related securities involves a risk of principal loss
