US Economy Is Still in Trouble, Weaker Dollar Needed

Even though sales of existing homes rose for the first time in 6 months, today’s reports on house prices and consumer confidence tell us that the US economy is still in trouble. According to S&P CaseShiller, house prices dropped over 10 percent, the largest decline on record. With the values of homes quickly slipping, it is hardly surprising to see consumer confidence drop to a 5 year low.

The weakness of the housing market spells trouble for the US dollar because housing is the backbone of the US the economy. The Federal Reserve will be forced to reconsider their plans to slow monetary easing.

As one of the lowest paid central bank Governors (if not THE lowest paid), Bernanke’s job is at stake. He can be dismissed by the sitting US President for practically any reason. Therefore he will do all that he can to avert a serious recession in the US economy in fear of backlash from US politicians.

If the US housing market weakens at a time when the slide in the dollar begins to moderate, the US economy could find itself in even more trouble. Over the past 6 quarters, exports have on average contributed nearly 1% to annualized economic growth whereas housing has subtracted slightly more than 1% during the same period. Therefore if the housing market continues to deteriorate and the dollar simply stays at current levels, GDP growth could quickly deteriorate.

That is why the path to a stronger dollar must be through a weaker one.
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Weak GDP, But Strong ADP Keeps 25bp on the Table for the Fed

What did this morning’s US numbers tell us?

We could see a blowout number in January job growth. ADP reported that 130k new jobs were added to US payrolls last month which dovetails well into the surprisingly low level of jobless claims that we have seen in recent weeks. The four week moving average of claims is now at a 3 month low which indicates that non-farm payrolls at bare minimum, more than 18k jobs were created in January . On top of that, the weather was unseasonably warm. With the strong level of ADP and the low level of jobless claims, non-farm payrolls could be as high as 100k.

The only monkey in the wretch is the manufacturing and construction sector which will continue to cut jobs. More layoffs were announced in the month of January at companies like Yahoo, Sprint, Lehman Brothers and General Motors.

What about GDP?

The US economy grew by 0.6 percent in the fourth quarter, which was half of the amount that the market had originally expected. Personal consumption also slowed from 2.8 percent to 2.0 percent while core price growth accelerated. These numbers confirm that even though consumer spending is slow, inflation remains a problem.

The bottom line is despite the weak job growth, the better ADP number and yesterday’s stronger durable goods data increases the chance that the Fed will cut by only 25bp. I still do not think this will be the case, but I suggest lightening up your positions for those of you banking on a 50bp cut.

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