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Sunday, April 1, 2012

Concern over the economic recovery

Tony Paradiso

I began the year attempting to be optimistic. I still believe this year will be better than the last, but not by much. Given the “finger in the dike” strategy the world is taking to solving its problems, new leaks must be expected.

The first leak of the week sprang when the Federal Reserve reaffirmed its commitment to keeping rates low. The comments spurred a triple-digit rise in the Dow. Is it just me, or are the markets that oblivious to the meaning of the Fed’s position? It’s a rhetorical question. Investors couldn’t care less about what may transpire in three months let alone three years from now. Just keep the cheap money flowing.

The Fed’s reaffirmation signals its continued concern over the economic recovery. In my world that’s a bad thing. To quote Mr. Bernanke “we cannot yet be sure that the recent pace of improvement in the labor market will be sustained.” When comments like that spark a stock rally something is amiss.

Although Spain has replaced Greece in the headlines, all is not well in the land of the gods. As expected, the distasteful economic medicine Europe has demanded that Greece take is causing political instability. Support may be collapsing for the major political parties who helped facilitate the problem, and then promised to enact deep spending cuts to resolve it. Recent polls indicate half the electorate plans to vote for fringe groups ranging from Communists to anti-immigrant neo-Nazis.

The elections that are scheduled to take place in the next couple of months will be the electorate’s first opportunity since late 2009 to express its feelings over recent events. I’m guessing it won’t go well for those in power. The two main parties won about 75 percent of the 2009 vote. This time their combined support is projected to be 35 to 40 percent.

Political analysts say Greek polls tend to be unreliable. However, unemployment in Greece is over 20 percent and half of those under age 25 are jobless. And its economy is expected to shrink 5 percent this year after shrinking 14 percent in the past four years. I can see the campaign slogan now: if you’re not unemployed vote for us and you will be. Not as catchy as I like Ike.

Circling back to Spain, a nationwide protest against austerity measures caused day-long disruptions throughout the country. The good news is that the strike called by Spain’s two largest labor unions was mostly peaceful. The protest came a day before the new budget was unveiled and followed a regional defeat for the nascent government. Like Greece, Spain suffers from high unemployment and the government’s vow of fiscal austerity will exacerbate the problem. In reaction, yields on Spain’s 10-year bonds approached three-month highs of 5.45 percent. Yields on Italian bonds also spiked to 5.24 percent, their highest level in a month.

Despite global headwinds the domestic news is more encouraging. Jobless claims fell to their lowest level since April 2008. And a Business Roundtable survey of 128 U.S. CEOs found that 42 percent expected to increase payrolls over the next six months.

Home price fell to new lows in January but the good news is that the rate of decline is slowing. With one of the worst markets – Phoenix – registering an uptick in prices, a bottom may finally be near.

The Standard & Poors’/Case Shiller index indicated a price decline of 0.8 percent in the three-month period ended in January. While the latest decline has brought the index to late 2002 levels, the monthly decline was much smaller than the drop of 1.1 percent in December and 1.3 percent in November. Adjusting for seasonal factors, prices were flat in January whereas last January prices fell 3.8 percent. At 0.4 percent the Boston area registered one of the lowest January declines.

The Case-Shiller index reports sales contracts recorded in the previous three month which means the current reading is measuring activity that occurred last fall. More recent data suggests continued improvement. Realtor.com reported that the median asking prices in February were up by 6.8 percent from a year ago.

Then there are oil prices which show no signs of abating. In an election year that means plenty of political fodder. As any Republican will tell you it’s the president’s fault. As any Democrat will tell you it’s the big bad oil companies.

Although President Obama has done little to maximize our energy resources, presidents have virtually no impact on short-term prices. Then again, reality has never stopped a politician from seizing upon a hot-button issue. But the Republicans gave the president a little ammo with which to shoot back when they voted down ending federal subsidies to the largest oil and gas companies.

Is common sense a dirty word in Washington? That’s another rhetorical question. The five largest oil companies earned a combined $140 billion last year. Do they really need $20 billion of taxpayer money? According to the Republicans, if we ended the subsidies, gas prices would increase further. According to me, I think they’re full of hooey.

Author, professor, entrepreneur, radio and TV commentator, Tony Paradiso can be reached at tparadiso@tds.net.