The upside potential is limited at this time. The problems are global in nature.
You have the massive debt crisis in Europe and the U.S., along with deepening U.S. deficit situations. We are seeing state governments take days off here and there in order to save a few extra bucks. But this is merely a loose bandage strategy and not a remedy for the ailing U.S. economy.
President Obama and the Fed realize the extent of the hurt. Obama introduced a $447-billion plan to drive job creation, but whether it will work or not is up in the air. It’s not going to be easy and everyone realizes this. The unemployment rate is over nine percent and we are seeing muted jobs growth. All eyes will be on the non-farm payrolls this Friday. The Fed feels that jobs will be an ongoing issue going forward with the unemployment rate holding at around nine percent for the short to medium term.
Faced with limited choices at its disposal, the Fed will try to influence the longer-term financing rate by shifting its bond holdings via its “Operation Twist.” So far, it appears that long-term mortgages are coming down, but I doubt it will be sufficient to help boost the U.S. housing market out of its cesspool. Foreclosures continue to drive housing.
I’m not convinced that any of the plans will work and feel that the economy will continue to face hurdles.
The U.S. could possibly move into another recession. Investment guru George Soros believes that the U.S. is already in a double-dip recession. In addition, the global economies are also at risk, especially in the damaged European economies with their massive debt. Greece will default if it cannot convince lenders to advance it a second round of capital.
Citigroup just cut global growth for the second time since September 6, 2010.
The National Association for Business Economics made a downward revision to the U.S. gross domestic product (GDP) to 1.7% for this year, down from 2.8% in May. For 2012, GDP is estimated to expand 2.3%, well down from the 3.2% in May.
Another U.S. recession is coming, according to the Economic Cycle Research Institute.
There is also news that China’s manufacturing sector stalled for the third straight month in September, which is causing concerns of slowing not only for China, but also its customers around the world. There are also worries about a potential property market correction in China given the inflated prices and tighter restrictions on lending. A property collapse would prove damaging to global markets. The Chinese economy is estimated to expand 8.7% in 2012, which is down from the current levels, according to Citigroup.
And, lastly, don’t forget about the debt and growth issues in the eurozone. Germany has approved revised lending requirements for Greece, but it will continue to be difficult for Greece to get out of its financial mess. Perhaps letting Greece default makes more sense, and then you can deal with the situation at that time. Moreover, Ireland and Portugal continue to struggle with muted growth and massive debt. Spain may be needing help.