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The Economic Recovery Has Entered a "Slow Motion" Phase
By Louis Navellier
Despite a painfully-slow recovery - reflected in the smallest-possible
(+0.1%) growth rates in the 10 leading economic indicators and industrial production - the stock market rose for the third straight week, reaching 18-month highs. While America reported producer price deflation last week, China is wrestling with rising inflation and trade protectionism. Meanwhile, our government is scaling back on its foreign policy goals, concentrating like a laser beam on the "urgent" need to pass a nationalized healthcare bill.
Stat of the Week: 7% Deflation (won't last long)
Deflation dominated the news Wednesday, when the Labor Department reported that the Producer Price Index (PPI) in February declined 0.6% (a 7% annual rate). Economists were only expecting a 0.3% drop, but since energy prices declined 2.9%, the index fell further. On the flip side: If crude oil prices continue to rise this month and in the upcoming months, wholesale inflation price increases will likely return soon.
On Thursday, the Labor Department announced that the Consumer Price Index (CPI) was unchanged in February and that the core CPI, excluding food and energy, rose just 0.1%. In the past year, the CPI is up 2.1% and the core CPI is up 1.3%, the smallest year-over-year increase in six years. But this low inflation is almost entirely due to housing, since "Owner's Equivalent Rent" accounts for about 40% of the CPI.
These low inflation rates gave the Fed added reasons for keeping short-term rates low. Last week's Federal Open Market Committee (FOMC) meeting also offered a slightly more upbeat outlook for the economy when it said that the labor market is "stabilizing" and that business spending on equipment has "risen significantly." The Fed also said it would keep rates in a very-low range for an "extended period."
These super-low rates on bank deposits, combined with a solidly rising stock market (up 10% since early February) have gradually lured more money back into the stock market. Assets held in money market funds fell below $3 trillion last month for the first time since 2007. In February, money market assets fell by $75.6 billion, the third-largest monthly drop ever, and the biggest since the panic of September, 2008.
Microscopic (0.1%) Economic Growth
Last Thursday, the Conference Board announced that the index of leading economic indicators (LEI) rose 0.1% in February, the 11th consecutive monthly gain, although +0.1% is the smallest possible gain, buttressing the growing perception that the U.S. economic recovery is now becoming painfully slow.
The Fed reported last week that February industrial production rose 0.1%, the eighth straight monthly increase. Due to severe snowstorms, economists were expecting a 0.2% decline, so +0.1% was a pleasant surprise. Economists also pointed out that U.S. industrial production is benefiting from a pickup in developing countries. In other words, strong economic growth in Asia, India and Latin America is keeping U.S. industrial production above water.
In the past year, U.S. industrial production is up 1.7%.
However, these tiny numbers will likely be trumped this Friday by the updated calculation for fourth-quarter GDP. Even with a slight cutback from 5.9% to 5.5% or so, that's better than most recoveries. The question now is - how can we keep growth anywhere near that high with slower first-quarter growth?
Another "green shoot" is the return of consumer spending, including vehicles. Last week, The Wall Street Journal reported that J.D. Power & Associates is now forecasting that March U.S. vehicle sales will reach an annualized rate of 11.7 million cars and light trucks, the highest level in 18 months, excluding last August, when "cash for clunker" rebates artificially boosted vehicle sales for one brief surge.
China's Rising Inflation is Fueling Protectionism
On Wednesday, the World Bank urged China to take more measures to cool its economy and fight growing inflation. In its latest China Quarterly Update, the World Bank raised its forecast for China's economic growth this year from 8.7% (which the bank projected in November) to 9.5%, suggesting that China use rate hikes and a stronger yuan to avoid inflation and an asset bubble in its domestic real estate.
China seems to blame some of its inflation on costly imports. By keeping the yuan low, that raises the price of imports, especially costly and trendy brand names from Europe and America. The fact that foreign brands dominate the China market rankles the central government's economic planners, causing some officials to criticize the quality and price of foreign luxury goods. For instance, there is a campaign in Zhejiang province to promote a "new consumption movement," which advocates "rational and responsible" buying and opposes "superstitious" or "abnormal" consumer activity or "showing-off."
Beijing also has some fiscal weapons to muster. As the U.S.'s largest creditor, China can sell its dollar holdings, or merely neglect to accumulate any more dollar-debt. Last week, the Treasury Department said that China cut its holdings of Treasury securities in January by $5.8 billion, down to $889 billion.
New Healthcare Tax May Spook Markets
Last week, President Obama initially delayed and then subsequently canceled his Asian trip, which was intended to strengthen U.S. ties in a region where China has become the dominant influence. Frankly, the U.S. is looking a bit panic-stricken to the rest of the world. This rare cancellation of a Presidential trip underscored how political challenges at home (especially the healthcare vote) have complicated the president's agenda, stirring debate on whether he may have to scale back some of his foreign policy goals.
The healthcare bill, passed on Sunday, still faces some hurdles. First of all, some states are prepared to sue the federal government to block proposed healthcare reform due to the costs it apparently adds to the states. Other costs will be levied on investors, who may fight back. The most contentious part of the healthcare bill is a 3.8% tax on "unearned income," such as capital gains, dividends and interest for couples earning over $250,000 (or individuals earning over $200,000), beginning in 2013, which is the year after the next Presidential election. We could see a negative reaction from investors to that tax as soon the details become widely known.
Update on Greece and Europe
The courtship between Germany and Greece is on the rocks. German Chancellor Angela Merkel is facing massive public opposition to bailing out Greece ahead of a crucial regional election in May. Last week, she said "a quick act of solidarity is definitely not the right answer." In other words, Greece may have to run to the IMF instead, since it is unlikely to get any help from its richer European neighbors in the EU.
The rest of Europe cannot help Greece that much. On Thursday, Eurostat announced that the euro zone turned from a trade surplus to a large trade deficit in January. The 16 euro-zone countries had a combined deficit of
$12.23 billion in their trade of goods during January, following a surplus of $5.63 billion in December. In 2009, France ran a trade deficit of $75 billion, while Spain had a $68 billion deficit.
Complicating matters further, France's President Nicolas Sarkozy has opposed Germany's recent push for the IMF to intervene and help Greece. Instead, France backs a European solution to help Greece and said the monetary union must act to restore investor confidence and shrink Greece's borrowing costs. However, without Germany's cooperation, any euro-zone solution would be next to impossible.