For the first time in over two weeks, the U.S. economy is back in focus. First we got 2Q earnings reports from Dell (Nasdaq:DELL) and Target (NYSE:TGT). Dell missed revenues slightly and offered a weak revenue forecast.
There was a time when Dell was an important measure of consumer and corporate spending. (It’s sales mix is roughly 75% consumer and corporate, 25% government.)
And while the company did say the economic environment was challenging, Dell has also missed important trends, like data storage and tablets. We have to think some of the weakness in Dell’s numbers are a direct result of Apple’s (Nasdaq:AAPL) success.
One analyst noted that 45% of Dell’s business is vulnerable to Apple. And Apple is even showing success in getting small and medium businesses to buy its Mac computers.
There was a debate between chip-maker Intel (Nasdaq:INTC) and research firm IDC about PC shipments this year. IDC has forecast weak sales, Intel has said PC sales, and hence chip sales, would be solid.
IDC notes that in the second quarter, PC shipments were up 2.6%. That’s even less than the 2.9% growth IDC had expected.
I think Intel might be wrong. Keep an eye on the stock. It was down 1% early on but appears to be recovering.
As further testament to Apple’s success, Mac sales were up 15% in the quarter. It now has 10.7% market share.
Why am I talking so much about computer sales? Because computers are an important measure of consumer spending. Looking at total sales, including Dell and Apple, it seems apparent to me that consumer spending is, at the very least, stable.
Throw in the positive earnings from Target this morning, and Wal-Mart (NYSE:WMT) yesterday, and we should feel a bit better about spending. And if there’s anything that’s going to keep the U.S. economy out of recession, it’s consumer spending.
I’m on record saying I don’t expect another bout of recession. I believe 3Q GDP will post at least modest improvement.
The Producer Price Index was up 0.2% in July, after it fell 0.4% in June. The small gain was a reflection of moderating gas and food prices. Take those two volatile items out and prices were 0.4% for the month.
More interesting to me was the year-over-year comparisons. At the wholesale level, prices are 7.2% higher. But again, that’s appears to be almost all energy related. Take out food and energy, and prices were up 2.5% over last year.
I should note that the Fed’s QE2 stimulus was a factor for much of that reporting period. QE2 pushed commodity prices higher, and probably helped that 2.5% inflation number
You may recall that Bernanke said the inflation caused by QE2 was "transient" and would moderate. We’ve seen oil prices move lower in the recent market carnage as investor’s feared recession. Natural gas, too.
At one point yesterday, the headline read "Merkel and Sarkozy Propose Eurozone Government." It may have been a coincidence, but the S&P 500 started selling after that story circulated.
Then, later in the day, the headline read "New Eurozone Government: Investors not Impressed" (or something to that effect).
Yet another plan from Europe to deal with its debt issues, and investors didn’t jump up and down with glee? You don’t say…
It’s easy to see why the European debt issue has been in the headlines for 18 months. There’s still no real solution. The EU central bank bond buying policy is not a long-term solution. In fact, it may even hamper a long-term solution because cash is being deployed to simply offset bond prices.
We can expect bond yields to go right back up when the buying ceases, because the EU central bank has not made enough of a splash. To truly turn bond prices around, investors need to believe that the EU central bank will buy Greek, Italian, Spanish, and Irish bonds relentlessly. But we know it can’t do that.
With no firm backing, the risk remains high. And with France and Germany still making proposals, there’s no firm commitment. So, it’s only a matter of time before Europe is back in the headlines again.