US economy facing twin-threat of budget deficit, rising unemployment

Tuesday, 23 June 2009 02:39:42 (GMT+3)   |  
       

General: Mixed in with some optimism, there is no shortage of worrying indicators for the US economy. Experts point to the still growing rate of housing foreclosures, rising gasoline prices and the precarious fiscal state of many states (California, for one, is drowning in red ink). But the biggest challenge right now for the Obama administration is the twin-threat of the budget deficit and the jobless rate. Both are seemingly out of control and fixing one could worsen the other. This year’s budget deficit will reach $1.85 trillion (that’s twelve zeros) and represents 13.1 percent of the GDP (the 2008 deficit was $459 billion or 3.2 percent of GDP). Meanwhile, unemployment is expected to hit an unacceptable ten percent this year. There are signs of green shoots, but they are still tender and will need the continuing care of the government in order to grow. However, the deficit will have to be reined in without jeopardizing this process. A tightrope act if ever there was one!

GDP: -5.7% in Q1 2009 from Q4. Compared to Q1 2008, the fall was -2.5%.

Consumer Prices: -1.3% in May (+4.2% from a year ago)

Consumer Confidence: 54.9 in May, up from 39.2 in April and 26.0 in March

Industrial Production: -13.4% in May from a year ago; -1.1% compared to April

Producer Prices: -5.0% in May from a year ago

Unemployment: 9.4% in May

Trade Deficit:
-$29.16 billion in April, -$711.0 billion for the past twelve months

Currency: 0.72 Euro to US$1 as of June 17 (0.64 a year ago) 

Housing: Housing starts in May rose to a seasonally adjusted annual rate of 532,000 units. This is 17.2 percent above April’s revised number and 45.2 percent below last year. Housing permits in May increased 4.0 percent  to a seasonally adjusted annual rate of 518,000 units (47.0 percent below May 2008). Existing home sales in April rose 2.9 percent from March to a seasonally adjusted annual rate of 4.55 million units (3.5 percent below April 2008). The national median existing-home price for all types was $170,200, down 15.4 percent from a year ago. Distressed properties accounted for 45 percent of all sales. Total housing inventory at the end of April rose to 3.97 million units, representing a 10.2-month supply at the current sales rate. Despite the increase, housing inventory over the past few months has been consistently lower compared to last year.

Automotive Industry: 359,256 units were produced in May or 52.5 percent less than last year. In the first five months of the year 1,947,121 units were produced or 52.2 percent less than last year. In May, 925,824 units of light vehicles were sold. This is 33.7 percent under May 2008. In the first five months of 2009 the decline of total sales was -36.5 percent compared to last year. The Ford F Series pickup remains the bestselling light vehicle in the US with 33,381 units sold in May or 39.1 percent less than last year.

Ford must feel very vulnerable these days. Its two domestic competitors are now mostly state-owned and kept afloat with taxpayers’ money. Between Chrysler and GM, $62.0 billion was spent to reduce their debts. GMAC, the lender that underwrites loans on behalf of these two companies, has received $13.5 billion of funding from the government. Moreover, it borrowed $3.5 billion for three and a half years at 2.2 percent with a guarantee from the Federal Deposit Insurance Corp (FDIC). Meanwhile, Ford started the year with debts of $36 billion and issued $1.1 billion worth of five-year bonds at 8 percent. Competition in the car industry does not necessarily take place on what economista like to call a “level playing field.”

Steel Production: 4.31 million metric tons in May or 50.6% less than last year. In the first five months of the year 20.1 million metric tons were produced or 52.8% less than last year.

Purchasing Managers’ Index:
According to the Institute for Supply Management, the PMI rose to 42.8 in May from April’s 40.1. It remains for the 16th month in a row in a contracting mode but it is getting closer to the 50 mark that would signal a turnaround.

Other data in that report were as follows:
New Orders: 51.1 (47.2 in April) – trend is “growing” for the first time in 16 months
Production: 46.0 (40.4) – “contracting”
Inventories: 32.9 (33.6) – “contracting”
Customers’ Inventories: 46.0 (49.5) – “too low” (!)
Manufacturing Sector: “contracting” for 16 consecutive months but at a slower rate
Overall Economy: “growing” for the first time in six months

Special Focus: A new Transport Bill: the House Transportation and Infrastructure Committee is trying to hammer out a new transport bill. Transport bills along with the Highway Trust Fund are essential parts of infrastructure projects which, in turn, are also important to the US steel industry. The old transport bill will expire September 30 and a bold new one calling for $500 billion of spending is hopelessly deadlocked in committee. Problem is, the government does not have these funds. The current Highway Trust Fund will be broke by the end of August and there seems to be no consensus on how to fill it again. It is primarily funded through gasoline tax, the income of which has been flat because cars are more fuel-efficient these days and less people travel because of the ongoing recession. $48.0 billion was appropriated for highway funds in the stimulus package but even these funds have not trickled down into real projects and the amount is relatively minor by comparison.


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