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Sunday, April 29, 2012

Signs of spring remain mixed

Tony Paradiso

The Federal Reserve issued its quarterly forecast adjustment, which is to the upside.

Am I missing something?

As the year began, the employment and economic data was relatively positive and the Fed expressed caution. Now, with the employment numbers weakening and Europe struggling to keep its bailout plan on track, the Fed’s outlook is brightening. I realize I don’t have Ben Bernanke’s economic credentials – just a successful track record of predicting economic conditions – but I don’t get it.

Despite the “improving” conditions, the Fed reaffirmed their intention to keep interest rates low through late 2014.

“It’s a little premature to declare victory,” Chairman Ben Bernanke said Wednesday at his post-meeting news conference.

Ya think?

Could the disappointing advanced reading of first quarter GDP have something to do with his reticence to declare victory? After growing 3 percent in Q4 of 2011, the initial first-quarter number registered only 2.2 percent growth. Although consumer spending remained strong, business spending contracted.

Regardless, I think Bernanke should demonstrate some confidence and declare victory. I’m sure President Barack Obama would be supportive of such a bold move. Heck, more of his fellow Fed committee members are moving in the direction of raising rates, yet he continues to hedge.

Mr. Bernanke indicated that the Fed has no plans to conduct further easing programs but stands ready to act if the recovery should falter.

Given his proclivity for simultaneously taking both sides of an argument, I once thought Mr. Bernanke had a future in politics. But his willingness to act when needed rules out a political career. He clearly doesn’t understand how Washington works. When the situation deteriorates, blame the other guy and do everything you can to ensure things don’t improve before the next election. Acting in the best interest of the country is conduct unbecoming of a politician.

As for the aforementioned employment picture, the latest jobless claims numbers remained near their four-month highs. It was the third straight week the initial claims numbers were above 385,000, and projections for April indicate payrolls will grow by 175,000. That isn’t exactly what you would call robust.

There was good news on the housing front. According to the National Association of Realtors, March pending sales of existing homes increased 4.1 percent on a month-to-month basis. The number of contracts signed to purchase homes hit the highest level since April 2010. More importantly, the first three months of this year represented the strongest start of the year for existing home sales since 2007. Weather may have played a part so let’s see what the second quarter brings.

If it weren’t for Europe, our economy would probably threaten 3 percent growth for the year. With 254 of the S&P 500 companies reporting, 72 percent have beat earnings estimates. Given the way the estimates are “gamed” take that with a grain of salt. But supporting the GDP data, mainline retailers such as Apple, Amazon and Starbucks announced strong quarters indicating consumers continue to spend. Still, Europe’s problems aren’t going away.

To no one’s surprise, confidence in the euro zone took a turn for the worse. The European Commission’s latest sentiment survey dropped from 94.5 to 92.8, its lowest level since the end of 2009. Sharp declines were registered among manufacturers and services and the outlook for bookings and employment also declined.

Ratings agency Standard & Poor’s – who is always on the bleeding edge of spotting potential troubles – downgraded Spain’s credit to triple-B plus. That doesn’t sound so bad. Three Bs and a plus? That would make a decent report card. I would loan them money wouldn’t you? In any case, everyone knows how important S&P’s ratings are on the financial markets. Just look at how negatively it impacted the United States. Our 10-year Treasury yields have skyrocketed to 2 percent.

Enter political pressures. Don’t be surprised if the tough talk about austerity morphs into an increasing sentiment for stimulus.

French President Nicolas Sarkozy – the key player along with Germany’s Angela Merkel – lost the first round of French elections to Socialist leader Francois Hollande who has pledged to campaign against a hard line of austerity. The two will face each other in a runoff for the presidency May. And the Dutch government – a staunch advocate for fiscal constraint – collapsed last week over differences on spending and tax cuts.

The key question is: can Europe walk the fine line between stimulus and fiscal reforms in the heavily-indebted nations? More importantly, even if Europe develops a viable plan, can they act quickly enough to salvage the year?

Europe’s problems are meaningful only to the extent that they impact China. In that regard China’s current-account surplus, the broadest measure of its trade balance with the rest of the world, dropped by more than half in the first quarter. The culprit: weaker exports.

Pay attention to the elections in Europe and the second quarter data from China. They will foretell how the second half will shape up.

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