Sarah’s Place

US Economic policy is a very complicated process which involves many different issues and attempts to stabilize economic activity including income, employment levels and keeping prices level. Each of the components will be covered in greater detail in upcoming articles.

The government has many tools that it may use to control or steer the economy. The Federal Reserve plays a large part in the effort to stabilize the economy.

The government uses monetary policy, via the Fed, in attempt to target variables, such as interest rates or inflation, by changing the money supply and/or interest rates. Examples include the recent recession where the Fed cut rates thirteen times in an effort to pull the economy out of a slump and it worked. With talk of a strengthening economy, the fed then raised rates seventeen times and may raise rates again to keep the economy under control.

Raising or lowering rates and adding or subtracting money from the money supply allow the Fed to add liquidity to the market in slow times – to help pull us out of a recession and subtract in stronger times – to head off inflation - to keep the economy stable.

The government also may use its power to attempt to control the economy as well. The government has the ability to tax and spend and may do this to help turn the economy around. For example, recent tax cuts helped to increase spending and propelled the nation into economic recovery.

Disclosure:  The information on this web site is for discussion and information purposes only. The opinions provided are those of Sarah M. Place and not that of Place Trade Financial, Inc. (Member FINRA/SIPC).  Nothing contained herein should be considered as an offer to buy or sell any security or securities product.  Please contact Place Trade for further information.

President Bush is expected to report his own October surprise later this morning, according to CNBC. Due to record revenues the US Budget Deficit has been cut in half. This announcement is so surprising because it is not suggesting that we would see this occur in a few years time, as we heard about an alleged surplus a few years ago, but that it has already occurred in the 2006 fiscal year that just ended!

• US Budget Deficit was reduced by $13 Billion
• The deficit is down 22% from last year last
• This is the smallest deficit reported since 2002
• The budget incurred record outlays which were offset by a 12% increase in revenues - including tax receipts

It is widely expected that the critics will claim that this administration inherited a surplus to dampen the enthusiasm of this surprising report. Surely the comeback will include the fact that we have been at war, we have suffered terrible tragedies like Katrina and Rita which have been a drain and the deficit has still been cut by an amount that is hard to argue with!

The information on this blog is for discussion and information purposes only. The opinions provided are those of Sarah M. Place and not that of Place Trade Financial, Inc. (Member FINRA/SIPC).  Nothing contained herein should be considered as an offer to buy or sell any security or securities product.  Please contact Place Trade for further information.

At a conference in Calgary, Former Federal Reserve Chairman Alan Greenspan spoke out on the housing market possibly to Uncle Ben’s Chagrin. Earlier this week, the current Federal Reserve Chairman, Ben Bernanke, said that the U.S. housing market is in a “substantial correction” and that we would likely lose a percentage point off economic growth in the second half of 2006 and may be further impacted next year.  Just two days later the former Fed Chief said that the “worst may well be over” in the U.S. housing slump.  Surely there was no intent to step on Mr. Bernanke’s toes but Mr. Greenspan’s words of experience may have had a soothing effect all the same.

In traditional Greenspeak fashion, there was more to be gleamed from his statement.  While he referred to a “flattening out’” of weekly mortgage applications after having previously dropped “very dramatically,” the former Fed Chief implied that inflation may be more of a concern as the end of the housing slump also signals an “end from the subtraction of growth.”   

An “end from the subtraction of growth” means that we may no longer receive the ‘benefit’ of the housing slump’s negative impact on the economy.  While not considered to a benefit by anyone with a For Sale sign in their yard, the declining housing market has helped to offset other stronger components of the economy and therefore contain potential inflation.  As with traditional style, Mr. Greenspan calms fears and issues caution at the same time.    

The September Monthly Jobs Report was released this morning after great anticipation. Stock jockeys were hoping for signs of a soft landing and as usual the bond traders were looking for a weak report. The report had a little bit for everybody and in the long run it came out disappointing and a bit of a wash. While the market likes the idea that the actual Non-Farm Payrolls for September were only up 51,000, the net effect of this number is actually up an additional 62,000 due to large upward revisions in the July (revised up 2,000) and August (revised up 60,000) numbers.

Here is the breakdown:

• September Non-Farm Payrolls were up 51,000 (188,000 versus 128,000 in August)
• Unemployment Rate was up 4.6% versus 4.7% in August (Considered a drop in the rate.)
• Average Hourly Earnings were up 0.2% (Which means that wages are going up.)
• Year over Year Wage Growth was up 4%. (This number may concern the bond market about inflation because the last time that we saw a number this high was back in March of 2001 when it was reported at 5%.)

Although the employment numbers are considered weak (a healthy number would have been considered to be over 100,000 before revisions) we should still keep an eye on these numbers. The revision of numbers has been further complicated by the upward revision of 800,000 jobs since 2003 which has recently been reported by Commerce Secretary Carlos Gutierrez in an interview on CNBC. This is important because the Fed is still very vigilant about the possibility of inflation and the slowdown in the housing market and weak unemployment numbers may not be enough to help keep inflation in check.

Signs of a stronger economy fueled investors and strength in the dollar hurt gold.  On Tuesday, oil fell below sixty dollars a barrel again; closing at $58.65 down $2.35 and gold took a significant beating down nearly 22 points.  As usual the analyst had varying opinions as to where the economy and markets were headed after this.  Some said that this meant that inflation was rolling over and that this clearly indicated that there would be a slow down in the US and the global economy.  Some said that the Fed would be making some major cuts while others claimed that the Fed would be raising rates again soon.  In his Stop Trading segment on CNBC, James Cramer was quick to say that he believes there will be no recession and that the markets are set to rally.

It will be great to see how this plays out.  If the oil traders are not just giving us a break until after the election and we are truly avoiding black gold’s tax on our economy; perhaps a recession will be avoided.  If we are really lucky; gold is telling us that it’s really not too late to avoid steep inflation as well.  Let’s keep our fingers crossed.

Disclosure:    The information on this web site is for discussion and information purposes only. The opinions provided are those of Sarah M. Place and not that of Place Trade Financial, Inc. (Member FINRA/SIPC).  Nothing contained herein should be considered as an offer to buy or sell any security or securities product.  Please contact Place Trade for further information.

For those of you who have been waiting with bated breath since the great bubble burst to see the Dow reach another high … the wait is finally over!  The Dow Jones Industrial average passed the old record closing high today ending up 56.99 points at 11,727.34.  By mid day, when the Dow crossed over its intraday record high reaching 11,758.95, CNBC began running highlights showing where stocks were the last time the Dow hit a high in 2000.  The results may surprise you.  Boeing is up 86%, Altria (formerly known as Philip Morris) is up 216%, Home Depot is down 41% and one of the best performing stocks of 2006, GM, is down 58%.

A word of caution for those of you who have been waiting for the Dow to get back to its old high before you open your statements; this rally may not mean as much as you might think.  While the Dow has finally reached a new record, the S&P 500 is still more than 10% off of its high and the NASDAQ is more than 50% off of its high.  Good luck seeing the latter anytime soon.