The Dow Jones Industrial Average (DJIA) recorded another difficult week in July last week, rising about 80 points to 12,881, as investor concern about the lingering European sovereign debt crisis and U.S. high unemployment had many market participants staying on the sidelines.
Further, the outlook among institutional investors (IIs) -- the hedge fund, mutual fund, and investment funds that determine stock and asset prices -- is now one of limiting and managing losses rather than generating double-digit returns on equity.
In other words, investors are concerned that problems in Europe and a lack of demand / dearth of consumers in the U.S. will lead to tough quarters ahead for a U.S. economy that's slowed to a tepid growth rate -- just 1.9 percent in the first quarter, after a 3.0 percent growth rate in the fourth quarter of 2011.
Those aforementioned troubles in Europe and the United States are more than enough to justify a large fiscal stimulus package, and there are other tell-tale signs, but first a little background:
The major problem with the first $786 billion stimulus in 2009 was that is was too small. Given the amount wealth and income taken out of the economy by the financial crisis, the fiscal stimulus should have been at least $1.2 trillion to $1.3 trillion. In fact, about a third of fiscal stimulus was tax credits -- not actual spending injected in to the economy.
Moreover, conservatives in the Republican Party in Congress and selected moderates in the Democratic Party prevented a sufficient stimulus from being passed, and that, as Keynesian economics predicted, limited the U.S. economic recovery. But given the problems in Europe, low employment in the U.S., and the current economic slow-down, there's no time like the present to pass a large fiscal stimulus package, and here are 5 other tell-tale signs why Congress should do so:
1 Jobless claims. After trending downward during much of the recovery, from the Great Recession high at/near 956,000 in January 2009 during the financial crisis' acute stage, claims have stalled at/near 388,000. That suggests the recovery, which had proceeded at a modest, if not adequate pace in 2011, lost some momentum in the first half of this year. Clearly, more end-market or aggregate demand will be needed for jobless claims to resume their downward trek: employers need to sure their existing customers will be there in the year ahead, in order to maintain staffing levels, and also to expand operations.
2 Oil. The price of oil, the world's most vital commodity, is also signaling that the U.S. economy and much of the global economy are losing momentum. Oil traded at/near $110 per barrel in late winter, but stair-cased down to about $77, before correcting higher, to about $92 on Friday. Further, most of the recent move up can be attributed not to increasing global oil demand, but geopolitical risk in the Middle East associated with sanctions versus Iran and civil unrest in Syria.
The key level for investors to watch regarding oil? The $70 level. For several reasons, the price of oil cannot remain below $70 per barrel if the U.S. and global economies are growing at a healthy rate. Hence, if oil falls below $70 and stays below it over one, two, three months, that's a sign of very low demand for crude -- the lifeblood of commerce -- and most likely a U.S./global economic slowdown, or recession.
3 U.S. Stock Market. Most investors do not need to be educated about this metric. The wealth effect -- or how wealthy American and global investors feel -- declines as stock markets decline. And lately, U.S. and global stock markets have not done too well: the Dow is essentially unchanged since the initial weeks of February.
Investors should also remember that the Dow Jones Industrial Average is a lead indicator -- not a current indicator. By lead indicator, that means the Dow is always projecting conditions out six to nine months, and by extension, the recent Dow side-ways action is forecasting an economic slowdown.
4. Housing Sector. Another economic indicator that most U.S. investors (and home owners) are aware of: the U.S housing sector remains sluggish at best, with many major cities still in a housing recession. Existing home sales are running at a decent 4.37-million-unit annual pace, but there's still a 6.4-month supply of existing homes on the market. Meanwhile, new homes are running at low 369,000-unit annual pace, with a 4.7.-month supply of homes on the market.
Conclusion: Until new homes sales return to the 400,000- to 500,000-level housing, housing, historically a driver of U.S. GDP growth, is not likely to contribute much to GDP -- in fact, it may detract from GDP in 2012.
Institutional investors follow the homes sales statistics because, historically, increases in home sales are strongly correlated with increased demand and an economic expansion. That's because housing activity does not operate in vacuum. When new homes are sold, homeowners tend to buy durables goods / big ticket items for the new home: furniture, appliances, home supplies, garden/landscape equipment -- an uptrend in each of which is good news for the economy and bullish for the U.S. stock market.
5. Job Market. Another economic statistic that most U.S. investors know about. The United States is short a staggering 10 million jobs, according to data compiled by the Economic Policy Institute, a liberal, Washington, D.C.-based think tank. Moreover, the total is much higher if you count both part-time employees seeking full-time positions, and discouraged unemployed Americans, who technically are not counted in the official, base U.S. unemployment rate. Add those two groups in, and the U.S. is short about 13 million jobs.
Conclusion: Job growth is required for a self-sustaining expansion. Simply, U.S. job growth of 150,000 to 200,000 new jobs per month must occur to get the U.S. economy growing at an adequate pace (3 percent of more per year) and to lower the nation's unacceptable 8.2 percent unemployment rate. Job growth averaged about 211,000 for November 2011 thru March, but has slowed to a 75,000-pace for April, May and June -- perhaps the strongest indicator of weakening demand.
The above five economic statistics -- initial jobless claims, oil, stocks, housing, and jobs -- all point to a slowing U.S. economy, and probably a global economic slowdown, as well.
Further, the problem in the United States is not investment capital or supply -- as supply-side economists and other conservatives assert: there's $55 trillion in investment capital in the U.S., and corporations have about $2 trillion in their cash accounts alone.
Also, the problem is not efficiency: U.S. multi-national corporations (MNCs) are among the most productive organizations in the world -- so productive, in fact, that their rightsizing has, in part, caused the smaller U.S. workforce of the current era.
Rather, the problem, as the above five statistics show -- is demand: there aren't enough customers.
Take a survey of local businesses in your section of the United States -- whether you're in Kansas City, Mo. or suburban Chicago, and odds are they'll cite a lack of traffic through their doors -- a lack of customers -- as their No. 1 problem.
Fiscal Stimulus: It Will Create Jobs
And that's why the United States needs a fiscal stimulus package: it will create many new jobs and help make-up for the demand hole that exists in the private sector.
Moreover, there's plenty of work that needs to be done and millions of talented, hard-working Americans who are willing to do it. Worthy projects include infrastructure rebuilding, school construction/upgrades, small grid/electric grid development, airport/rail/public transportation expansion, hospital expansion/construction, and research aimed at developing a next-generation car. There are literally dozens of investments Congress can make to strengthen the economy today and better-prepare the U.S. for the 21st century economy.
What size should the fiscal stimulus be? A minimum of $500 billion. Preferably, more than $800 billion.
To be sure, the above investments are not cheap. But the social and economic costs of a U.S./global recession will be far greater -- and there's also the risk of rising social unrest, in both the U.S. and abroad -- all the more reason for Congress to make the investments needed to get the U.S. economy moving again and get the American people back to work.
Joseph Lazzaro, U.S. Editor, served as Managing Editor of New York-based financial news web sites WallStreetEurope.com/WallStreetItalia.com, 1999-2004, and as Economics...