De Groote Financial Group October 2, 2015 No Comments

The U.S. Economy Created 142,000 Jobs in September, Far Below the Expectation of 200,000… 

The reports for August and July were revised lower, by 37,000 and 22,000 respectively. 

What it means – Less. That’s the theme of the entire report. Fewer jobs were created than expected, hours worked declined, labor force participation dropped, and even earnings fell, albeit slightly. The unemployment rate remained steady at 5.1%. Analysts are jumping up and down, calling this an inflection point for the economy. Maybe, but it’s not like we had explosive growth before this summer. As we’ve often pointed out, this recovery has the benefit of $4 trillion new dollars, and can’t manage to grow faster than about 2%. The report gives the Fed yet another reason to hold off on raising rates this year, which is why interest rates tumbled after the release. 

S&P/Case-Shiller Home Price Index (HPI) Down 0.2% for Third Straight Month… 

Home prices are rolling over, falling slightly in most markets. However, the annual change is still positive at 5%. 

What it means – The monthly S&P/Case-Shiller HPI is seasonally adjusted, so we don’t put much stock in it unless the index moves significantly. Down 0.2% isn’t much, but as the third straight loss, it’s worth noting, even though the annual change is still up a solid 5%. Deeper in the report things get more interesting. Detroit, the long-time bottom-dweller in terms of home prices, was replaced by Chicago. Apparently, many people are getting the message that living in the Windy City is about to get expensive as the government goes trolling for tax revenue to pay underfunded pensions. 

U.S. Exports of Goods and Services Fell 3.2% Compared with Same Period Last Year… 

Both foreign demand and the strong dollar weighed on exports. 

What it means – Watch out for falling GDP! Countries love exports because they mean other people are buying their stuff, contributing to economic growth without demanding any services or even taking jobs. Falling exports hurt — just ask China. The tough part for the U.S. is that there’s no relief in sight. The global economic situation is deteriorating and the U.S. dollar should only get stronger in the months ahead.

Atlanta Fed GDP Now Model Forecasts Third-Quarter GDP Under 1%… 

The model had been steady just under 2%, but with weak manufacturing numbers this week, the forecast dropped sharply to 0.9%. 

What it means – This model has been more accurate in forecasting GDP than any other we have seen, so when it drops by almost a full percentage point in a day, we take notice. The consensus estimate of third-quarter GDP is 2.4%. We’ll see who is right when the first official estimate is released near the end of the month. 

Flash Estimate of Euro Zone Inflation Down 0.1%… 

The provisional inflation gauge dipped in September, from a modest 0.2% reading in August. Most of the decline came from the energy sector, with the core reading at 0.9%. 

What it means – The big worry today is deflation, but falling energy prices are great for most economies, so if inflation dips because oil and electricity are cheaper, then so be it. The bigger worry for the euro zone is that without energy and raw food costs, inflation is still below 1%. For an economic bloc that’s trying desperately to convince savers to spend, this low level of inflation just won’t do. Expect the European Central Bank to announce that its current quantitative easing program will increase from $65 billion per month, extended past September 2016, or both. Subsequently, the U.S. dollar should gain ground. 

Euro Zone Unemployment Stuck at 11%… 

Dragged lower by outliers Spain (22.2%) and Greece (25.2%), unemployment in the monetary bloc remains in double digits. 

What it means – German unemployment dipped to 4.5%, while French unemployment rose for the third straight month to 10.8%. Unemployment in Italy was also in double digits at 11.9%. The big picture remains the same. Germany is strong, while its neighbors struggle, but devaluing the euro affects them all. Such a move might help the struggling countries a bit, as they try to sell more goods outside of the euro zone, but their biggest trading partners are each other. Germany, the biggest exporter of them all, reaps the biggest reward as the euro falls. 

Sales Tax on the Greek Isles Rising to 23%… 

Rising from 16%, the higher sales tax is part of the concessions Greece made with creditors to receive its latest bailout. 

What it means – Whatever barter system already existed in Greece will only get bigger. Greece doesn’t need higher taxes on transactions. The country needs to enforce taxes on income and property, and dramatically revise their work rules, public employment rules, and pension system. The chance of all that happening is pretty close to zero.

Japanese Industrial Production Fell 0.5% in August After Dropping 0.6% in July… 

Analysts expected industrial production to climb 1% last month. The sequential decline makes a technical recession in Japan, marked by two quarters of declining GDP, a real possibility. 

What it means – Prime Minister Shinzo Abe’s three arrows of economic reform didn’t just miss their mark, they failed to make it anywhere near the target. Inflation and growth did not return. The country is left with more debt, more yen, and a lower standard of living. But hey, that’s OK. They’ll probably just agree to print even more yen, go deeper in debt, and lower the standard of living yet again.

Doug De Groote, CFP®, MBA, CTC
Managing Director

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