Don’t Just Look to Europe; U.S. Has Its Own Issues

Stock markets are battling negative sentiment here. The situation was helped by the crisis in Europe, but you cannot just blame the Europeans, as there is a financial mess of our own here.We have the PIGS (Portugal, Ireland, Greece, and Spain) battling with debt issues in Europe. Spain is not fully there yet, but may inevitably need to find money. These countries are referred to as the PIGS because of their need for financial help.

Stock markets are battling negative sentiment here. The situation was helped by the crisis in Europe, but my economic analysis is that you cannot blame the Europeans, as there is a financial mess of our own here.

The key stock indices are languishing below their respective 50-day moving average (MA) and 200-day MA. The near-term technical picture is bearish and is dangerous at this time without any base or support.

A debt resolution was approved by the Senate and White House. The deal calls for a $2.1-trillion increase in the debt ceiling to around $16.4 trillion, which will allow the country to pay its debt obligations and spend. First of all, this is just adding to a massive debt load. In return, there will be spending cuts of about $2.4 trillion; but over a 10-year period!

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The debt increase is not what we needed, but was essential. The government will need to focus on the cost side and implement its own austerity programs with discipline in order to cut the deficit and begin to work to bring down the massive $14.6-trillion national debt. It’s scary looking at the debt load and watching the mounting interest payments.

And in a “what if” scenario, can you imagine the impact of higher interest rates? It would make interest payments much higher and make it that much more difficult to reduce the debt load.

The problem, as I have been saying, is that the U.S. economy is not faring well and is below President Obama’s hopeful expectations after spending nearly a trillion dollars in infrastructure spending along with QE2.

The sky is not falling yet, but may be pretty close to it.

Just take a look at the second-quarter GDP that came in at a meager 1.3%, well below the 1.7% estimate. In contrast, China is slowing, but is still growing at around nine percent!

And making matters worse was a downward revision in the previous first-quarter estimate to a dismal 0.4% from 1.9%.

JP Morgan downgraded its estimate for the Q3 GDP to 1.5% from 2.5%.

I doubt we will see another recession, but you cannot brush this off. The probability for another recession is below 50% in my view, but it is still a possibility.

Manufacturing numbers continue to show a stagnant economy. The ISM Index was flat at 50.9 in July, its lowest reading in years and well below the revised 54.0 in June. An ISM reading above 50.0 represents expansion, so the reading is a concern.

The ISM Services index was also weak and grew at its lowest rate in 17 months.

Factory orders also declined in June.

So the red flags are evident. It’s becoming clearer that the U.S. economy is at risk for another decline and possible recession if stalling continues and the jobs market fails to ignite.

With the higher debt ceiling, we may yet see QE3.