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The 2 Percent Solution Isn't One

12:00 AM, Jul 7, 2012 • By IRWIN M. STELZER
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There is little doubt the economy is not moving forward at a pace that is likely to whittle down the unemployment rate soon, or by very much. In June, the factory sector contracted for the first time in three years, according to the Institute for Supply Management surveys. Exports, which have been an important source of growth, continued to grow, but at a slower rate. Europe’s recession and a weakening euro (now at around a two-year low) that makes American goods more expensive in Europe are combining to reduce demand for made in U.S.A. products. Ford and Harley-Davidson, among other companies, report significant drops in sales in Europe, and Caterpillar’s formally robust growth in Europe, Africa, and the Middle East now fits Lagarde’s description—tepid—although the company nevertheless predicts record earnings for the year. Analysts are expecting falling overseas sales to cause drops of around 25 percent in the second-quarter earnings of Ford and GM, with some predicting the GM drop will come to as much as 45 percent. Meanwhile, with growth in China slowing, Nike and other firms that have a significant presence in that market are hurting: Orders for future delivery of Nike products are running about 2 percent above last year’s rate, compared with recent growth of 20 percent.

Closer to home, much depends on two things: the willingness of consumers to spend, and the willingness of businesses to invest. Although wages seem to be rising, consumers, who account for 70 percent of the entire economy, are cautious. A weak jobs market, widespread press coverage of Europe’s problems, the slowdown in China, Iran’s refusal to halt its nuclear weapons program, and political deadlock here have brought consumer confidence down to its lowest level this year. Retail sales at the 18 chains tallied by Thomson Reuters did rise in June, but only be 2.5 percent, the slowest pace since November 2009. (Necessities did better: sales at Limited’s Victoria’s Secret were up 7 percent.) But gasoline prices are down, and average hourly earnings and hours worked by those with jobs are up, perhaps signaling an improvement in consumers’ circumstances in coming months.

Meanwhile, businesses continue to sit on their cash—$1.74 trillion in liquid assets at last count. With profits under pressure, Europe in recession and China struggling to regain its past growth rate, our economy headed towards a fiscal cliff, the fortunes of pro-business candidate Mitt Romney waning, health care costs likely to soar now that Obamacare has been declared constitutional, wait-and-see is the corporate and small business order of the day.

The only good news comes from the auto and housing sectors. Domestic vehicle sales in June topped last year’s total by 22 percent, as consumers continue to replace a fleet that is about ten years old. As for housing, prices are up, sales are up, rents are high and rising, builders are more active, and interest rates on long-term fixed rate mortgages are around 3.6 percent, the lowest since such mortgages were first offered in the 1950s.

Still, the bad news trumps the good, leading to calls for the Federal Reserve Board to follow its UK, Chinese, and European colleagues and start another round of monetary easing. Don’t bet on it just yet. Fed  chairman Ben Bernanke is not a “ready, fire, aim” kind of guy.

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