Chief Executive Officer (CEO) confidence in the US economy is significantly down, by 16 points, according to the Conference Board.
Those who make investment and hiring decisions within US borders are feeling the coming jitters because exports are falling largely due to crisis in Europe and inflation in Asia, especially at a time when the desirable outcome for the policies of the Obama administration is to double US exports by end-2014.
Unemployment stands still at 8.2 per cent with the economy stabilizing at creating about 70,000 – 80,000 jobs per month – a third of the number needed to achieve full employment by 2014 (250,000 per month is the required job creation number), prices have fallen by 0.3 per cent in May and may continue to fall to maintain domestic consumer demand, an ominous sign for anyone familiar with depression economics (for example, 60 million Americans – a fifth of the nation’s population – are on Medicaid despite the Affordable Care Act a.k.a Obamacare).
Job quality and committed budgets in wages paid by corporations are mediocre and unemployment is stubbornly high to balance between inflation prospects due to wages and downside risks to personal consumption expenditures (PCE) because the Federal Reserve is unflinching about its goal of maintaining inflation at a target of 2 per cent core PCE (excluding oil and food prices, inappropriate measure in our view).
Stocks of publicly-owned corporations are performing fairly because money being supplied by the Federal Reserve at near-zero per cent Federal Funds Rate and expected to be so through end-2014, is being distributed between government bonds and stocks as the demand for cash in the money markets falls.
The Dow Jones Industrial Average (DJIA), comprising the 30 largest US corporations and representative of various industry groups, had peaked at 14,164.53 on October 9, 2007 and, about 2 years later, troughed at 6626.94 on March 06, 2009. Unemployment rate in October 2007 was 4.7 per cent and in March 2009 was 8.7 per cent.
In June 2012, DJIA was at 12,880 and unemployment rate 8.2 per cent. Housing and business fixed investment stabilized at low or mediocre levels, and inventory investment is mediocre and recovering but uncertain.
The 30 US Corporations representing American industry on the DJIA have until end-2014, the usual 2-year term of most US corporate CEOs, to increase domestic investment to return unemployment to 4.7 per cent by end-2014 before the DJIA can return to above the 14,000 mark.
Discipline in policy communication as above by, and hence credibility of, the Federal Reserve can potentially avert unsustainable financial asset prices by end-2014 (exacerbated by any home refinancing toward personal consumption as before 2007) and not become a political-economic experimental test of the July 2010 Dodd-Frank law expected to be fully implemented by end-2014 oblivious to consumer circumstances and the impact of the downside risks to consumer spending on the economy as a whole because of the unabated employment and income uncertainties being experienced by a majority of Americans in this new normal economic structure of severely skewed income distribution where the top 10 per cent of income earners are expected to offset any fall in personal consumption expenditures of the remaining 90 per cent.