"Kee" Points with Jim Kee, Ph.D.


Going back to the 1920’s, the third quarter is by far the worst quarter for stocks (first quarter is the worst for GDP), but this third quarter was truly awful! And there was no shortage of reasons for it: a raucous debate over raising America’s debt ceiling, a downgrade of the world’s risk-free asset (U.S. debt), Europe’s intensifying debt problems, a President who would rather impose on the “rich” than make a move toward the middle, and, of course, hurricanes and earthquakes (Strategas). I certainly hope the fourthquarter has a few more positives!

We will bereleasing ourthird quarter webcast this week, and I usually give a summary of my portion in theMonday Smart Points. Here are 12 key ideas:
Even though U.S. economic data is weak, it still points to continued, moderate expansion, not recession. That’s true of production data, jobs, sales, durable goods orders, etc.The same can also be said for some of the more reliable recession indicators.Remember that recessions are usually preceded by declines in housing and autos (“consumer durables” spending), but these cyclical drivers have already “crashed.”Unfortunately, they also normally lead expansions, but they haven’t this time, not yet anyway. Fortunately, business investment spending and exports have filled the gap.Until these consumer durables rebound, the U.S. will be more dependent upon and sensitive to exports and global growth (i.e. China), than it normally is.As an aside, housing and auto purchases require confidence in employment, which comes from more overall job creation, which comes from business confidence to hire.Business confidence to hire has probably not been helped by regulatory uncertainty and change in healthcare, energy, financials, and stepped up actions by agencies like the EPA.An interesting conclusion to be drawn from this is that more certainty on the policy/regulatory front should make us less dependent upon exports for growth because it would likely lead to an upturn in hiring and discretionary (“consumer durables”) spending.That’s not the only reason why global forces matter. The world’s economies, not just their stock markets, are more synchronized or correlated now than they once were. In the 1990s, for example, a lot of the world – Japan, Europe, Asia – could be mired in recession, low growth, or outright collapse while the U.S. economy could continue to chug along. However, increased global interdependence means that this is probably less true today, and a given international macro-shock could affect the U.S. economy more than it would have in the past.10) Europe’s inability to deal seriously with its debt crisis after almost two years is causing concern in this new globally interconnected market. We didn’t think the Japanese tsunami, the rise in energy prices that peaked in May, or Middle East disruptions could move the U.S. economy from expansion to contraction, but a mishandled European debt crisis probably could.The Europeans need to move quickly to expand their lending facilities, and profligate countries need to make good on commitments to make some cuts. I think they will.Global financial stress indicators seem to be saying the same thing: heightened concerns but not a 2008 repeat.Conclusion: We have to see how things unfold, pure and simple. One guidepost I’m watching is the third quarter GDP number, to be released at the end of this month. If it is stronger than the second quarter (1.3%), then things are on track. If it is weaker, then they aren’t.

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Jim Kee, PhD, President & Chief Economist
South Texas Money Management
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