By now you know that over the weekend, Standard & Poor’s reduced the debt rating on the United States…
We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.
Subsequently, investors sold stocks and bought gold and U.S. debt.
That’s right, the U.S. dollar went up and the yield on U.S. Treasuries sank.
Money rushed into what had just been downgraded, thus proving wrong all those talking heads who said interest rates would skyrocket.
Every major index dropped nearly 5%.
Sweet Texas crude dropped to $80 a barrel, and the photos of sad brokers popped up on news sites.
President Obama got on the cable and said a few platitudes, kicked the blame off on someone else, and the market dropped another couple hundred points. He thereby proved the point of the downgrade.
Personally, I believe (albeit with no logical reason to do so) the government will do something to fix the debt and restore the United States to fiscal responsibility.
But that’s another article.
Today, I’d like to point out that it isn’t 2008. Times may be difficult, but the global economy isn’t in free fall.
In fact there are several positive trends…
Seven Bullish Points
First, let’s look at some leading indicators.
In its latest report, The Conference Board Leading Economic Index for the United States increased 0.3% in June to 115.3% (2004: 100%), following a 0.8% increase in May and a 0.3% decline in April.
The largest positive contributions came from money supply, the interest rate spread, and building permits.
Ataman Ozyildirim, economist at The Conference Board wrote, “The leading indicators point to slowly expanding economic activity in the coming months.”
That doesn’t sound like Armageddon…
Rates Keep Dropping
What happened to interest rates in all this chaos?
They went down.
You can now get a 30-year fixed for 4.33%. Housing starts have found a bottom and even turned up a bit. I don’t expect they will return to 2005 levels, but the fact that they aren’t plummeting is something.
There is no inflation. The latest CPI showed deflation (-0.2) in June over May.
More recently, gasoline and oil prices have been falling. Again, good news for consumer spending.
Unemployment is Stable
The official unemployment rate fell from 9.2% to 9.1%.
I know there are many people who point to U6 and the job participation number as negative, but it seems to me that most corporations are running lean and mean. Productivity is up and profits are at all-time records.
According to the Commerce Department, American businesses earned profits at an annual rate of $1.659 trillion in the third quarter. That is the highest figure recorded since the government began keeping track more than 60 years ago.
At some point, companies will become more concerned with missing opportunities than with mere survival. That’s when they start to hire again.
Furthermore, the dollar has stabilized at a low point at the same time wage inflation in China has reduced the benefits of sending jobs overseas. This scenario is allowing U.S. exporters to hire people at home.
Case in point, GE is adding jobs in Detroit. According to Bloomberg:
Chief Executive Officer Jeffrey Immelt has said GE will add more than 15,000 jobs in the three years through December. About 1,100 will be just outside Detroit in a center for information technology, a field emblematic of outsourcing. So far, GE has hired about 660 people in Michigan.
Jobs.com reports: “Automotive manufacturing in South Carolina sees significant growth and expansion.”
And according to Dr. Ali Anari at Texas A&M, “Texas is the one state to experience both a 3% annual job growth rate for the year ending in June and relatively stable home prices the same month.”
Retail Sales Are Doing Fine
People Are Buying Online in Record Numbers
Retail sales increased 0.1% for June 2011. They are up 8.1% from the same time last year. April retail numbers were revised down to a negative 0.1%.
Autos increased 0.7% in June and are up 9.3% from June 2010. That’s good news.
Trade Is Up
Unlike the Depression, when protectionism ruled the day, free trade means more profits.
Shipping Rates Stop Falling
One of the big leading indicators — the Dry Bulk Shipping Index — has bottomed out and is making higher lows:
If we were headed for a recession, you’d expect this to be falling off a cliff. It’s down… but it’s not out.
And the last reason this market isn’t like 2008 is because there is plenty of credit.
The TED Spread is the price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for Eurodollars having identical expiration months.
The TED Spread is a sign of credit risk. This is because U.S. T-bills are considered risk free, while the rate associated with the Eurodollar futures is thought to reflect the credit ratings of corporate borrowers.
As the TED Spread increases, the risk of default goes up; when it narrows, the risk of default goes down.
In the fall of 2008, when banks wouldn’t lend to each other overnight, the TED Spread jumped 350 points.
Note that big spike right in the middle:
Yesterday, on the first day of trading after the S&P downgraded U.S. debt, the TED Spread moved up a massive ten points all the way to 26…
That means banks are still lending overnight to each other.
There is not a lot of worry at this time over a default. This is not 2008.
Editor, Wealth Daily
P.S. My buddy Steve Christ saw this dip coming. He shared his insight with you last week.