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Economic Update for the Week of 7/6/2012

Spanish 10-year bond yields rose back over 7% which shows the continued weakening credit situation in the country. This comes just a week after the major European bank bailout program was announced. The saga continues.

The Institute of Supply Management (ISM) survey which measures the manufacturing sector was expected to come in at 52 (above 50 is growth) however the reported number was 49.7 which is a contraction. This is the first contraction in this measure since June of 2009. US consumers are slowing down along with a decline in purchasing of US goods from China and Europe. We are all intertwined now and the slowdown in these other countries clearly affects our economy. Meanwhile weakness in such measures adds to the likelihood of more QE (Quantitative Easing/Stimulus) from The Fed.

Several major central banks, The Bank of England, China, and Europe cut interest rates and/or reserve requirements in an effort to boost their respective economies. It should be obvious at this point (but is not for these institutions) that these efforts have minimal effect. That is great to lower rates in attempt to spur borrowing however when these countries and their citizens are already drowning in debt, they are just not going to take on much more no matter how low the rates. The low rates do help the wealthy and corporations to refinance long-term debt however the average person does not benefit much from these rates and (easily) arguably hurt by the low rates because their savings produces little earnings. This hasn't worked since the crisis in 2008 and it's not going to work now.

5 year commercial loans that were made at the peak in 2007 are now coming due. The payoff rate is only at 28% according to Trepp, LLC. Most of these commercial loans are interest only with balloon payments. This could really hurt regional banks that are heavily invested in commercial real estate.

The non-farm payroll report showed 80,000 jobs were created in June however the birth/death adjustment was a positive 124,000. Remember for a jobs number to be statistically meaningful, we need to add or lose more than 129,000 jobs. So this number is not statistically meaningful on its own. If we consider the birth/death adjustment, then one could consider that we actually lost 44,000 jobs. In May, if we remove the birth/death adjustment, we lost 137,000 jobs. As news of layoffs from companies like RIMM, it would not surprise me that we are in fact losing jobs and the birth/death model is simply distorting reality. Even if the numbers were accurate and we added 80,000 jobs in June and 69,000 in May, these numbers are still below the estimated 150,000 jobs that need to be added just to keep up with new entrants to the workforce.

It is time for people to realize that this was no ordinary recession. Nearly 5 years after the peak, we are still far below the number of jobs we should be at and need to be adding to see economic expansion. It is just not happening and we are starting to see weakness in a variety of US and foreign economic values that point to trouble ahead.

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