Mel's Blog

July 17, 2013 Market News

July 17th, 2013 10:46 AM by Mel Samick

GDP issues around the world remain an ongoing concern. China is in the news today, with an annualized second quarter GDP growth of 7.5 percent. Markets, reportedly, regret the double digit growth of some years ago. China has declared the deliberate reduction of its growth as a part of their "soft landing" program which was previously announced. Analysts are now concerned that this landing may be getting "harder" and that China lowered their GDP growth target in an attempt to assure the rest of the world that the situation is under control.

The concern with China is based on the concepts popularized by Paul Krugman some years ago. As Krugman explained, the rapid economic growth of developing countries comes from a pool of idle resources (labor, natural resources, etc.). Developed countries should not fear rapid expansion of young economies in the long run, because their rates of growth may not be sustained. It is not clear whether the slow-down in China is a managed slowdown of an economy with potential or that the "soft landing" concept was introduced as the economy hit a maturity stage and double digit growth has become unsustainable.

The lower growth should decrease the long-term risk of the economic system; this is a part of the economic cycle smoothing practices (counter-cyclical economic policy). After the recent crises, even Western Europe, despite their near-zero growth, stands for counter-cyclicality. Counter-cyclical ideas are not highly regarded in the U.S. business world. The macroeconomic policy is "pro-cyclical", when government would not intervene to reduce the magnitude of the GDP up or down movement in the hope that higher peaks of the cycle will still outweigh deeper bottoms.

High economic growth is not a concern in the developed world at this time. Recently, the U.S. stock market reacted sharply to the news of possible Fed stimulus withdrawal. The episode is not, in fact, indicative of the state of economy, but demonstrates that investors believe the economy is still on life support. The FOMC minutes, published this week, indicate that the Fed began planning the eventual asset purchase trickle down. However, the details of the future process are in the early stages of development and actual beginning of the process will be dependent on economic data.

Jobless Claims last week increased above the prior reading and expected level; however, they remained within the "healthy" boundaries favoring economic growth. Import and Export prices decreased 0.1 percent, while Producer Prices grew 0.8 percent in June. Consumer Sentiment for July measured at lower than expected levels, with the expectation component weighting down on the composite index while the current conditions component remained strong.

Retail Sales increased less than expected in June, with the major part of the growth propelled by automobile sales. The core component was only up by 0.1 percent. Business Inventories were up only slightly in May. The Empire State Manufacturing Survey shows that the New York economy is on a rise this month. On Tuesday, Consumer Price Index, Treasury International Capital, Industrial Production and the Housing Market Index will be reported, followed by releases of Housing Starts on Wednesday, and Jobless Claims and Philadelphia Fed Survey on Thursday.

Mel

Information Provided by NYCB Capital Markets

Posted in:General
Posted by Mel Samick on July 17th, 2013 10:46 AM

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