Do you feel somewhat confused by conflicting comments on the markets? You are not alone. There were two articles by Bloomberg and the Wall Street Journal reporting the results from a survey of 48 economists surveyed by the National Association for Business Economics. The economists were extremely bullish according to this quote, “Corporate investment will contribute to stronger growth in the U.S. and the economy will start to add jobs early this year. Spending on equipment and software by companies is expected to increase 7.2% this year, up from the November survey’s projection for a 4.2% gain, (median estimate of the 48 economists). Purchases will rise even more next year, jumping 8.6%. Corporate spending will help drive economic growth of 3.1% this year and 3.2% in 2011,” the economists said really? Corporate spending only makes up 30% of the economy, the other 70% is consumer spending. Yet the same article says the US has lost 8.4 m jobs since the crisis began and in another article by the Washington Post the housing market is dissected in all its gory details starting with new home sales plunging to a record low in January of just 309,000 units, down 11.2% when economists (possibly the same ones) had been expecting a 5% increase. Worse, the various government support programs are due to end soon, namely a $1.25 trillion program from the Federal Reserve which has held down mortgage rates. That policy is set to end March 31 and tax credits of $8,000 for first time buyers to bolster home buying are scheduled to expire at the end of April.
Reinforcing the obvious conclusion that the fall in house sales is due to a lack of consumer confidence, the Conference Board reported Tuesday that its Consumer Confidence Index fell almost 11 points to 46 in February, pushing the index down to its lowest reading since last April. At 46, the index is a long way from the 90 reading that economists generally view as depicting healthy consumer attitudes.
What really worries me and makes me question the economists rosy predictions is an article in Thomson Reuters regarding unintended fiscal tightening caused by bank lending rules being tightened in China and from investors risk aversion as sovereign debt worries widen. The article suggests we are in the grip of dis-inflationary, if not outright deflationary forces, and states that core consumer prices fell in January for the first time since 1982 driven by falling rents, car prices and cheaper clothing. Wal-Mart results confirmed the trend reporting last week that same store revenues fell last quarter by 1.6% driven by deflation in electronics and groceries. Such weak consumer indicators, if they persist, do not bode well for corporate profits this year.
So who is right? Is corporate growth going to sustain strong GDP growth in 2010, and to whom are those corporations going to be selling if the consumer is not buying? Are we relying on exports, if so to whom? Europe is in worse shape than the US and Japan isn’t a whole lot better. China is driving up the cost of commodities but exports to China are not booming and may fall if Beijing follows through with threats to blacklist firms like Boeing that are supplying Taiwan with defense equipment.
I don’t want to be a kill joy but the National Association for Business Economics survey sounds a bit too rosy to me, and that’s before anyone mentions double dip.