Economy unravels amid debt circus

As Americans focus on budget negotiations in Congress, the US may be headed toward another recession.

By TheStreet Staff Aug 1, 2011 12:16PM

By Frank Byrt, TheStreet

 

While Americans focus on debt and budget negotiations in Congress, the nation's already fragile economy may be heading toward another recession.

 

As an example of how bad things are, the Institute for Supply Management said Monday that its index of manufacturing activity dropped to a reading of 50.9 in July from 55.3 in June. Economists had expected the gauge to remain unchanged.

 

The Commerce Department also said last week that gross domestic product (GDP) growth -- a measure of all goods and services produced in the U.S. -- rose at a meager 1.3% annual rate in the second quarter, well below economists' projected 1.8% growth. A year ago, the economy expanded by 3.8%.

 

The dour data come as President Barack Obama and Congress try to end a stalemate over the budget deficit and whether to raise the debt ceiling. During the weekend, Democrats and Republicans agreed to a plan to raise the debt ceiling in two steps and reduce federal spending by $2.4 trillion over 10 years. Concern over how to sustain U.S. spending in the long term lingers as the current proposal prevents a U.S. default but doesn't discuss where spending cuts would be.

 

While Republican House Speaker John Boehner still faces the challenge of garnering enough Republican votes to pass the proposal, the latest agreement is seen as the most promising considered so far. The debate has roiled global markets and threatened consumer confidence.

 

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That's troubling because consumer spending, which makes up about 70% of GDP, was already a big part of the underperformance last quarter. It fell to a 0.1% rate of growth, the weakest since the recession ended two years ago.

 

Mark Zandi, a chief economist for Moody's Analytics, now projects that GDP will end 2012 almost $75 billion lower than previously projected, which is almost half a percentage point of GDP, and that's due largely to expected cutbacks in consumer spending.

 

Contributing to skepticism about the government's ability to accurately monitor the economy, the Commerce Department dramatically cut its revised GDP growth measurement for the first quarter to 0.4% from its previously reported 1.9% and then cut the growth rate for the fourth quarter of 2010 to 2.3% from its previous 3.1% estimate.

 

On top of that, the government says it recalculated data from the 2007-09 recession and found that the economic decline was much worse than previously reported, with economic output declining by 5.1% instead of 4.1%.

 

Scott Brown, a chief economist at Raymond James in St. Petersburg, Fla., said the revisions are a "real shock" because the economy clearly has a lot less momentum than the nation was led to believe. "So, obviously, it's a big concern, and then we have this nonsense on the debt ceiling issue, which is totally unnecessary, but it has created a crisis that we're seeing the economic implications of now."

 

Paul Larson, an equities market analyst for Morningstar, said the lower GDP numbers are especially disappointing, given that "in the first quarter we were in the heart of QE2 (the government's economy-boosting program) and there were still some remnants of the stimulus spending" from last year that was also aimed at boosting economic growth.

 

"To have this low rate of growth with this sort of government spending going on, which it now looks like we probably can't afford, is pretty disappointing," Larson said.

 

Indicative of investors' concerns, Brown said, people are taking money out of money market funds, which are typically backed by Treasurys and agency debt from Fannie Mae and Freddie Mac, and putting it into cash, since they are concerned about the rates they'll get if Treasurys get downgraded if Congress fails to approve Sunday's plan on the debt ceiling by Tuesday.

 

A credit-rating downgrade of Treasurys would also affect thousands of municipal bonds, because their rates are tied to Treasurys, which means already cash-strapped states and cities would have to pay more in interest on their debt.

 

The high rate of unemployment remains another major problem. Government statistics put it at 9.2%, and although new claims were reported down slightly in the week ended July 23, the figure doesn't include people who have exhausted their claims and fallen off the unemployment rolls and have given up looking for work or are working part time and want to work full time.

 

Zandi wrote in a July 11 research note: "June's dismal employment report highlights the severity of the current economic slowdown. Job growth has all but stalled, and unemployment is inching higher again. With so many idle U.S. workers, wages are barely growing."

 

Brown said one of the contributors to the strong corporate profits seen in the first half of this year is management's ability to keep a lid on labor costs.

 

Larson said that, conversely, "from a corporate perspective, there's not much to complain about, because they're in relatively healthy financial condition."

 

He said most major companies' cash holdings are at or near all-time highs and corporate profit margins are also close to all-time bests. "There are really no signs of material economic weakness in the earnings we've seen in the second quarter."

 

But Zandi notes rather ominously that "the odds of a new recession in the next year have risen to 1 in 4. U.S. sentiment is extraordinarily fragile. It is not hard to imagine  consumers pulling back and businesses cutting payrolls if anything else goes wrong.

 

"A failure by lawmakers to quickly raise the debt ceiling and agree on a deficit-reduction strategy certainly qualifies, as does a near-term Greek default or a bumpy landing in China," Zandi said.

 

Investors are seeking safe-harbor investments to avoid the volatility that the debt crisis has caused and to avoid a market crash if there is no resolution from Congress.

Morningstar's Larson said gold is a popular choice for investors, although it has no real economic utility. But they are also investing in the currencies of AAA-rated countries such as Switzerland, Canada, New Zealand and Australia.

 

He cited two health care stocks as relatively solid choices in the current turmoil because they are relatively "economic insensitive" as necessities. They are the drugmakers Abbott Laboratories (ABT) and Pfizer (PFE).

 

Larson said Pfizer is going to have to deal with the loss of its top moneymaking drug, Lipitor, which faces patent expiration later this year. "But if you look beyond that, the company said it expects to earn above $2 a share in 2012 and it's trading at just over $19 per share, and has a 4.13% dividend yield.

 

Another stock that should weather the economic turmoil in good shape, he said, is Exelon (EXC), a diversified electric power producer, and the largest nuclear power producer in the U.S.

 

Larson said Exelon should benefit from steadily rising energy costs. It is trading at a relatively cheap 14 times forward earnings estimates. "We think it's worth $58 per share" and it's now trading around $44 and has a dividend yield of 4.7%.

21Comments
Aug 1, 2011 3:24PM
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News flash. We were never out of the recession!
Aug 1, 2011 4:50PM
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What, the recession ended two years ago? really? for who? Has anyone noticed a difference over the last 3 to 4 years?

I'm convinced it really doesn't matter who is in office - Dem or Rep. the biggest factor is that they are politicians, and keeping this in mind, as trustworthy as a snake oil salesman. How embarrassed we should all be to have them running our country.
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...may be heading into another recession?

 

About 55% of the American people are suffering in a downward spiraling Recession, 35% are barely surviving in the throes of a decimating Depression, and the other 10% don't give a rats ****.

 

That's a reality!

 

 

Aug 1, 2011 4:39PM
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Return the jobs they sent abroad and to Mexico and we will be back to where we once were. If not, then keep reeling downward.
Aug 1, 2011 10:01PM
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Whether people want to admit it or not it is the wealthy...who get all of these tax breaks,(35% tax bracket) who create the jobs in this country. We are not talking about the extremely wealthy corporations who are moving production abroad in droves because of the highest tax rates IN THE WORLD. We are speaking of the vast majority of new job creators. The small business owners, such as myself. I make a very good living and am in the 30% income bracket. I have created jobs, not through any stimulus, but from working my tail off finding more work for my employees. (Construction firm) You can yell and scream all you want about us paying our fair share, but I think we already do. I pay $.30 for every dollar I earn. Not to mention the amount I have to pay for matching SS for EACH employee. I think that's more than fair! There has not been one tax hike that EVER created a job.
Aug 1, 2011 5:04PM
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Is there anyone surprised that the economy is sluggish.  Our leadership has been saying for months how poorly the economy has been handled by the Democrats and that it is just a matter of time before the whole thing tanks.  Two years ago economists on both sides of the political spectrum said that this would be a very long recovery.  Five years was the number being discussed back then.  What has changed that makes that guess no longer true.  Instead of fighting about who messed it up I would like to see all three sides looking at an effective comprehensive means of preventing the same thing from happening again.  How can we as the world's larges economy allow mega sized financial conglomerates to crash our system?
Aug 1, 2011 8:19PM
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How about putting people back to work. 

 

I'm ABSOLUTELY POSITIVE the millions of unemployed would be more than happy to pay taxes IF they had income from a job. 

 

Quit the F'ng bickering, create income producing / tax paying jobs.  Guaranteed there will be a lot more people walking around with smiles on their faces.

Aug 2, 2011 7:34AM
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Ah , The politicians all talk like they know what the hell they are doing. Would someone please wake up! We gave 700 BILLION to banks and financial institutions in a bailout. What we should have done was give every american taxpayer a voucher for up to 100 thousand dollers. The voucher could only have been used to pay off debt (mortgages, car payments, student loans, credit cards, Etc). The banks would have gotten the money but it would have been in the form of debt payments so banks and financial companies would have been fine. People could have afforded new cars because they were out from under the crushing debt they had. Personally my wife and I would have paid off our home and cars (we don't carry credit card debt) and would be actually able to buy some of the things we want but are not really necessities so we would be helping to build the economy Her car is fairly new but mine is 6 years old. Guess what ! I would have bought a new car. we would have done some home improvements. Instead the banks are hoarding the money WE gave them and nobody is buying anything they don't have to. Good work Washington! You have shown everyone that your head is still planted firmly up ypour backside and will remain there until you are dead and buried. It is no wonder most of the american people could not pick you face out of a crowd. Noone has seen it for years.
Aug 2, 2011 5:39AM
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Sure glad this is the summer of recovery...!

Would hate to see what mess America would be in ...

otherwise...lol

Aug 1, 2011 3:35PM
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On target Brian. Need to add, we will never be
Aug 1, 2011 4:28PM
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In 2001 taxes were reduced and that has not worked out well so just one time raise them as a test!!
Aug 1, 2011 11:01PM
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dont look to the government to create jobs.they can only spend money gotten from the private sector.our current economic problems all revolve around one central problem a lack of good paying jobs.free trade/job exporting made it much more profitable to hire cheaper foreign labor then americans.what we need is tariffs that level that playing field and return labors ability to organize and demand a fair share of the profits.other wise companies that care nothing for this country will continue to pay bottom dollar or hire cheaper foreign labor
Aug 1, 2011 10:22PM
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johnjack: On target Brian. Need to add, we will never be

I really hope not!  I have no agenda.  Other than the US and as many people to be successful.  We have to get out of this depression.  Even if it means voting out or some how getting rid of the current banking and political power structure we have right now.

Nomoreobamer: Return the jobs they sent abroad and to Mexico and we will be back to where we once were. If not, then keep reeling downward.

 

That and all over the world.  That needs to happen.  Stupid trade has to stop.  Vote out all politicians who are still serving the loonytoon express called  "globalization." That was just some sugar word packaged so it could be shoved down peoples' throats.  What we are doing is stupid trade, no other country would engage in such brainless strategy as we have for the past 30 years and more specifically 10 years.

T79: I think that this as#hole that keeps saying we are going into another recession is a fool and that people need to stop worrying and gain confidence back...With people like this, how are we getting our confidence back????!!!!!

To some people, its not just a confidence game.  Heck, its not even a game.  Its called reality.  Of which you must live in some other realm of existance.  Do I have a job? Am I making enough to save for the future? Am I making enough to have any quality of life?

For wally street folks like you, it may appear to be just a perception gig.  Well, we on mainstreet can't just phoney our way into making a business.  We actually have to make real things that actually work.  Unless you want to buy an imaginary bike I have for 5 million dollars? I sell it to you!!! Let me know!! It comes in what ever color you can imagine.

  For people like you, you are living in the fantasy land that got us here in the first place.

 

  Step aside.

 

Rand1123: What, the recession ended two years ago? really? for who? Has anyone noticed a difference over the last 3 to 4 years?

I'm convinced it really doesn't matter who is in office - Dem or Rep. the biggest factor is that they are politicians, and keeping this in mind, as trustworthy as a snake oil salesman. How embarrassed we should all be to have them running our country.

Yep it's time to get an actual third party.  Not some backed tea bagger r us by fox noise and friends.  Or weirdo liberal pot smoking green party.  Its just time to start a fresh.  But who am i kidding? that probably won't happen. But I can dream and we can keep griping until it becomes loud enough and local enough we start actually meeting.  Gotta start some place.  Gripe first, turns into some friends griping, turns into an actual meeting turns into a new candidate and boom.  Well... it better happen til the real crap hits the fan LOL! 

Or it won't be that peaceful.

Aug 2, 2011 8:02AM
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Go into your neighbors house, take his cash and then tell the judge you were just getting your fair share of his profits!
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we should sign a bill that says not made in usa. us donesnt buy that would fix the economy in days
Aug 2, 2011 2:13AM
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There is something way more important than the economy going on right now and should be addressed first.

Jennifer Lopez fans: the singer is returning to American Idol!!

Please, lets get our priorities in the correct order.

 

Aug 2, 2011 12:01AM
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Until you own the company you have NO rights to any profit!
Aug 1, 2011 9:34PM
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america held hostage by tea party and not enough republican leadership to make them fall in. yes, the wealthy should pay their fare share taxes. they get the tax breaks to create jobs and that's fine but where are these jobs. sick and tired of seeing jobs go overseas. if american jobs leave america then make them pay dearly. we should even pass a law against outsourceing.hm,he was a republican so we couldn't. last time     i heard so much commotion about debt was the last time we had a democrat as president. where was all this excitement when bush spent more then all the other presidents combined. that's right he was republican. seems now there are 2 republican parties
Aug 1, 2011 5:47PM
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End the wars...now. End the Bush tax cuts...now. End the corporate welfare system...today. Republicans have proven again and again they know nothing about economics. My financial life has become stronger, because I invested in me. Paid off my house (did not upsize), car, and owe no money and still have a credit rating over 900. I watch my investments and learned along the way how to make the market work for me. It can be done even in these hard times. I really don't think most Americans understand that we where very close to a depression. Most Americans want a quick fix , well it takes a lot of work....and most Republicans are lazy.

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