U.S. economic data from the end of summer has generally been better than expected. That happy trend continued this week in the form of better-than-expected home sales and durable goods orders. However, all is not well in Mudville, as significant economic risk factors emanating from Europe, from Asia and from Washington D.C., in the form of the Fiscal Cliff, remain in place. Existing home sales increased by 2.3 percent in July, and new home sales gained 3.6 percent for the month. Buyers appear to be responding positively to firming prices, which are visible in most major markets. However, the flattening of existing home sales bears watching. New orders for durable goods increased by a robust 4.2 percent in July, boosted by civilian transportation equipment. New orders for motor vehicles and parts gained 12.8 percent, while new orders for commercial aircraft and parts gained 53.9 percent. Aircraft orders are somewhat lumpy and can skew the headline data. A core measure of durable goods orders, for nondefense capital goods excluding aircraft dropped 3.4 percent, showing a weak base for manufacturing. Also, civilian aircraft orders are being increasingly challenged by weak global macroeconomic conditions. Quantas Airlines just cancelled orders for 35 Boeing Dreamliners. Initial claims for unemployment insurance for the week ending August 18 increased by 4,000 to 372,000. Initial claims appear to be leveling out again after improving at mid-summer. Europe is supplying more fodder for the financial press as summer vacations end and the work of bickering begins in earnest. Financial markets are waiting for signs that Germany will back a massive intervention by the European Central Bank. Meanwhile, Greece is back on the hot seat as their economic base continues to melt away, throwing into doubt their ability to live up to the terms of their bailout. GM has reached a deal to reduce hours at its Opel unit in Germany. China is showing deteriorating manufacturing conditions. The HSBC purchasing managers’ index fell to 47.8 in July, well below the break-even 50 level. China has responded to slowing export demand by easing monetary policy and by engaging in fiscal stimulus; however, there is concern that the policy response so far has been too timid. The Congressional Budget Office has re-confirmed its estimate that the unadulterated Fiscal Cliff “will probably lead to a recession in 2013 and an unemployment rate that remains above 8 percent through 2014”. The $500 billion swing in tax increases and federal spending cuts will occur in early 2013 unless current law is changed. The Federal Reserve appears to have lowered the bar for additional monetary policy measures, and increased expectations with the release of its minutes of July 31-August 1. It is more likely than not that the Fed will announce additional monetary policy actions at its upcoming September 12-13 meeting. It is important to note that in the battle of the FOMC versus the Fiscal Cliff, the Fiscal Cliff likely wins. Even in the event of more juice from the Fed, the odds of recession in 2013 remain very elevated.
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