 |
Problematic Credit Risks
By Dr. Charles Lieberman
The economy continues to
muddle along. Second quarter
GDP will be revised significantly higher, even as job
losses and the June surge in
energy costs hurt household income
and spending. But it is the ongoing
restraint from poor credit availability
that threatens to undermine the economic
outlook and has some forecasters
expecting very little growth in the
second half of the year. The Fed needs
to improve credit availability, or any
pick-up in economic activity will remain
tenuous.
The economy is holding together,
despite major crosscurrents. The surge
in crude oil prices in June was truly a
major adverse event that greatly weakened
consumer spending that was
already under intense downward pressure.
Households reacted quickly to rising
energy costs, curtailing spending
on autos and light trucks. Businesses
reacted by cutting back production
and inventories. A sharp rise in exports
was a saving grace.
The weakness in housing and inventories
set the stage for a better
second half, especially if the first half
increases in oil prices are reversed in
the coming months. Housing starts
are approaching a bottom and will
exert less of a drag on the economy
over the balance of the year. Inventories
need to be rebuilt. Exports are
likely to remain on a solid upward
track. This scenario would be very
comforting, if not for the restraint
coming from the credit markets, which
remain a major concern. Risk spreads
have not narrowed and banks have
restricted credit availability. Mortgage
rates have actually increased.
These developments could derail
recovery.
It is clear that Fed officials understand
the issues and their public comments
focus more on the downside
risks to the economy than on inflation
concerns. This is the correct priority.
While core inflation is above the Fed’s
policy objectives, the indirect effects of
surging energy prices surely accounts
for some of that increase. Moreover,
labor costs remain well contained.
Therefore, it is very likely that inflation,
both total and core, will moderate in
the coming months.
So, the Fed should focus on the
downside risks to the economy. Despite
its effort to improve credit
availability, major problems remain
and these could keep growth weak
or push the economy into recession.
There has been some speculation the
Fed could reduce interest rates. (Market
sentiment swings wildly; it hasn’t
been more than several weeks since
the market was priced for multiple rate
hikes in 2008.) Rate cuts are unlikely,
but more progress is badly needed for
credit flows to improve.
FA
Dr. Charles Lieberman is the Chief
Investment Officer at Advisors
Capital Management, LLC.
His Phone 201-986-1900; Email: chuck@advisorscenter.com; Website: www.advisorscenter.com
Advisors Capital Management, LLC
(ACM) is a provider of privately managed
portfolios for industry professionals and
their clients. Although the information
included in this report has been obtained
from sources ACM believes to be
reliable, we do not guarantee its accuracy.
All opinions and estimates included
in this report constitute the judgment as
of the dates indicated and are subject
to change without notice. This report is
for informational purposes only and is
not intended as an offer or solicitation
with respect to the purchase or sale of
any security. ACM is a registered investment
advisory firm. Web Address: www.
advisorscenter.com
115 West Century Road, Paramus,
NJ 07652 Phone: 201-986-1900.
|
