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Economic Update for the Week of 10/19/2012

As earnings season is underway, several big names have missed estimates such as Google (shares dropped about 9% before trading was halted), GE, & McDonald's  This is not unexpected given the weakening economic date recently and earnings are starting to show the weakness. As noted before, despite massive stimulus, the economy just isn't getting better. People just aren't spending more money and we are starting to see the effects of that. In what looked like a temper tantrum when investors sold off Google, what happens to the aggregate market when GDP goes negative? It is very possible that if more negative earnings reports come in, the markets will begin a long overdue correction or even bear market. For now it seems that the anticipation of the elections has everyone holding their breath and once we know who the next President is going to be, expect the markets to make a big move one direction or the other. If the economic data is weak, that big move is likely to be down. 

Not surprisingly, US jobless claims spiked back up to 388,000 after a substantial drop last week to 339,000 which was later revised to 342,000. This could have been due to a seasonal adjustment or change in how a State is reporting, but either way it was expected and it happened. Last week's lower jobless numbers was an anomaly. 

Consumer prices rose 2.0% over the past year as interest rates remain at record lows and those who are rejoining the workforce are doing so with less income. The Fed continues to shift wealth from savers and earners to the banks and this will probably continue for at least another three years given past statements by Fed Chairman Ben Bernanke. Meanwhile retail sales rose 1.1% for the month of September over August however 0.6% was due to inflation, not increased consumption. 

Some good news on the housing front as housing starts exceeded estimates at 872,000 which was likely the cause for a pop in employment and wages. Selling new homes doesn't create jobs, building new homes does. All of the materials that must be produced and constructed employs many people which is why there is so much hope for a recovery in housing as it is assumed that employment would get better. Unfortunately the 872,000 is the weakest level seen in both the 1981 and 1990 recessions so a surge like this is still not enough given the extremely low levels from which it rebounded. This is a good sign however it is still going to take years for the damage to be repaired in housing. 

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