The downgrade of the US by Standard & Poors after the market’s close on Friday had been widely expected. There was a flurry of finger-pointing and hastily-called meetings over the weekend, but the decrease in the stock indices we are seeing today reflects a healthy return to the fundamentals of investing more than they reflect any damage attributable to the ratings of the US. The fact remains that the global equity markets are fearful of sustained weakness in the US economy as well as in Europe. The possibility of Greek/Italian/Spanish debt default far outweighs any AAA/AA rating of the US. The fact is, the investing community values the US Treasury market as much for its depth and liquidity as it does for any specific rating, so we are not surprised to see a flight to US debt at this time. So, what are the prospects for growth in the US for the remainder of this year?
With the recent revision to GDP showing a deeper recession, a slower recovery, and more inflation, markets were nervous ahead of Friday’s employment report. However, while not a grand slam report, it wasn’t all that bad. The private sector created about 145,000 jobs in July (picking up some of the slack in government layoffs) and the last two months (of disappointing data) were revised higher. The first chart below shows the long-run history of private sector employment. This recession’s recovery appears to be playing out like the last two—maddeningly slow recovery in jobs.
Drilling down to look at the monthly change in private sector employment, the spring weakness appears to have not been a trend. If you recall, we saw this same concern—and market gyrations—last summer.
If we look at money supply growth in the next chart, it appears we are finally getting some traction (up over 6% year over year) from all of the liquidity which the Federal Reserve has foisted on the banking system. All in all, while Europe’s problems shouldn’t be overlooked and China’s attempts to cool their economy are a concern, we think the second half could show better growth than the first.