US economy will remain weak in the second half

The evidence continues to mount that the US economy is not only currently in a soft patch, but that the much anticipated second half rebound is unlikely to occur. Worse still, there is even a risk that the economy slips back into recession, though Warren Buffet dismisses that dire possibility.

What is the evidence supporting the conclusion that economic growth will at least continue lacklustre for an extended period? The latest employment report alone provides ample evidence of the economy's malaise. The official June unemployment rate edged up to 9.2%, from 9.1%. But, the more realistic U-6 unemployment rate, which includes discouraged workers and those who took part-time work because they could not find full-time work, rose to 16.2% from 15.8%. The household employment survey, from which the unemployment rate is calculated, declined 445,000 seasonally adjusted in June. The more followed nonfarm payroll employment survy was up a mere 18,000 in June after a revised 25,000 rise in the previous month.

The June nonfarm payrolls rise reflected a seasonally adjusted 57,000 increase in private employment and a 39,000 decline in government employment. The decline in government employment is likely to persist as state and local governments continue to scale back their expenditures in order to curtail their excessive budget deficits, as mandated by law in most states. The relatively small seasonally-adjusted increases in private sector employment the past two months may actually have been declines if, as expected, the boost to employment to reflect assumed hiring by unsampled new firms, which was 131,000 in June, did not in reality occur. There were also declines, even if slight, in hours worked and average pay, confirming current and prospective economic weakness.

The widely respected ECRI's propriatary leading US economic index declined 0.7% to the lowest level this year. That points to further economic weakness over the next six to nine months.

Consumer confidence edged lower, suggesting consumer spending restraint.

In addition, there are a number of other very serious negatives for the US economy. The financial sector remains saddled with a large volume of unrecognized losses and nonearning assets that pose a threat to many institutions capital adequacy and willingness to lend. There is still a huge overhang of unsold residential housing that will soon be augmented by a new wave of forclosures. There is an excessive volume of debt owed by business, Federal, state and local governments and consumers that need to be worked off. The debt problems of Europe did not end with the aid to Greece. The problems of Greece have only been postponed. And Portugal, Ireland, Italy and Spain may well experience similar financial strains. That reality,together with efforts by China to slow speculation and high oil prices, will serve to keep global economic growth restrained.

The forgoing is virtually certain to keep Fed policy on hold for a very extended period,probably until after the Presidential election next year. In concert, that has implications for investment choices. Treasury note and bond yields will either stay low or, more likely, decline further. That should lead to a further decline in maturity yield spreads. Continued low borrowing costs are likely to keep firms such as Annaly (nly) and cypress, both listed on the NYSE, highly profitable. Another investment worth considering is a portfolio of Build America Bonds. While the Federal program to encourage state and local governments to offer taxable municipals has ended, and with it new issues, there are still some attractively priced Build America Bonds available in the secondary market.


Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

This and prior reports can be accessed by going to internet explorer at philipbraverman.blogspot.com

I can be contacted at Philip Braverman@Gmail.com