Nobel Prize winning economist Paul Krugman thinks August is the trough month for the U.S. economy. And yes, he is reading a lot into the improved unemployment numbers from July.
Of course, it took trillions in direct spending, guarantees and loans to do it, but he believes we’ve got actual growth coming. It’s worth noting, too, that Krugman estimates the stimulus plans have saved 1 million jobs. So, without the stimulus, unemployment would be around 12%.
*****Krugman’s not the only one feeling good about the economy. Also at the Capital Markets Symposium in Kuala Lumpur, economists Laura Tyson (White House economic advisor) and Raghuram Rajan (former IMF lead economist) echoed his feelings. We even heard that a new bull market is here from Goldman’s reclusive strategist Abby Joseph Cohen.
The evidence? Well, there’s the improved unemployment numbers, better than expected Q2 GDP number, improved manufacturing numbers, and improvement in the Case-Shiller home price index.
What’s missing? Retail sales and commercial real estate.
*****Last week, we got sales reports from a variety of retailers, and they were not good. Clearly with 6.5 million people out of work, there’s simply not as much money to be spent. But perhaps equally important is whether employed consumers start to feel more secure and start spending more.
This week, we get earnings from Wal-Mart (NYSE:WMT) and Macy’s (NYSE:M). I expect Wal-Mart will be fine. I’m not so sure about Macy’s. Investors are also looking forward to back-to-school shopping. Early expectations are that sales will not be good for back-to-school. That probably means there’s room for an upside surprise.
Of course, stabilization of the unemployment rate is critical for spending. But so is new job creation. And frankly, that still seems likely to take some time. It’s likely that GDP growth is capped at 2% for 2010, and probably 2011, too.
*****We’ve discussed commercial real estate here in Daily Profit. Now, the Fed appears ready to discuss this issue. It’s reported that the FOMC will have commercial real estate on the agenda at this weeks’ meeting. That sounds like bad news for the bears…
If the Fed wants to do something about commercial real estate, it certainly can attack the problem via interest rates or loan guarantees. And with another weight lifted off the market’s shoulders, we could expect stock prices to head higher.
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