The economic recovery is fragile.
Instability in the U.S. and Europe could spread into consumer confidence and limit growth.
In the U.S., the Gross Domestic Product is expected to stay below 2.0% this year.
In Germany, the IFO business climate index fell instead more than 4 points in August, the largest decline since November 2008.
European markets have been under intense pressure lately and the negative energy has expanded to west and east of the globe.
The Federal Reserve is adopting a “wait and see” approach, as confirmed by Chairman Bernanke last week during the Jackson Hole speech. Everything is postponed to September’s meeting. Mr. Bernanke expects the economy to pick up again in the second part of the year, after milder first six months. Is he right? Durable goods orders rose 4% in July, but they fell 1.5% excluding aircraft and defence orders. Unemployment stays high. Consumer spending is still trending, but it might start to fade, if negative news from the financial markets will begin to contaminate household confidence. In effect, both the Michigan and the Philadelphia surveys are pointing to a decline of consumer faith that could limit growth in the coming months.
Housing prices are basing?
The housing sector remains a drag to the economic growth. In fact, despite low rates, demand is subdued. Mortgage activity declined more than 9% lately and reached the lowest level for 2011. How can it be different? About 20% of the households are still in red with their mortgages, as unemployment stays high, despite improving lately. President Obama initiatives are welcome. Nevertheless, housing rebound is slow, inventories are high and the recovery might take years. Existing home sales fell by more than expected in July and housing starts slipped to new lows. Is there some light at the end of the tunnel? Maybe there is. House prices could try to base at current levels. Let us see how. Since 1969, the housing market topped roughly every 9 years (1969, 1981, 1990, 1999, and 2007) and bottomed every 10 years (1971, 1982, 1992, and 2002). From top to bottom, declines lasted for about 2 years (69/71, 81/83, 90/92, 07/09 (?). New highs were then reached after 3/5 years from the bottom. The current decline started in 2007.
A stable economic recovery would be difficult to achieve without a rebound in the housing sector. In fact, the economic picture does not look great, if technical, cyclical and seasonal conditions are taken into consideration. The medium trend is still down, although rebounds to 1250/1300 are possible. Supports could instead be found at 1100, 1000 and eventually 850. Seasonally, the indexes are weak during this part of the year. Finally, there are cyclical components. In the past 100 years, the DJI topped and bottomed roughly every 4 years. Declines lasted for about one year from tops. The S&P 500 topped last in 2007. So, the economy is just correcting or the decline will extend? The thick economic calendar of the coming week should provide a clue on the still evolving economic situation, but the appetizers of August and July data have not been welcoming.
Angelo Airaghi, www.ProfitsOn.com
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