Farrell:  We Like What We See

On Thursday Goldman Sachs saidthat since inventory liquidation has been so pervasive, the second half of 2009 will see stronger growth as that liquidation process is reversed. Specifically, they feel the second half GDP will grow at a 3% rate, much better than their prior estimate of 1%.

Goldman Sachs logo
Goldman Sachs logo

We have been feeling the same for some time.

Lyle Gramley, our chief economist, would agree with their feeling for the direction of the economy for the second half.

We have written about the Cash for Clunkers programand how auto inventories have been massively depleted. Inventories were down $141 billion in the second quarter — $16 billion in autos alone — and Thursday's retail sales resultsand comp store sales comparisons showed that industry has been working down inventories as well. Next week we'll see reports on both wholesale inventories (Tuesday) and business inventories (Thursday). Both are expected to be off again which will only highlight the extended nature of the liquidation.

Initial unemployment claims were at 550,000 down 30,000 from last week and the fifth week in a row we registered below 600,000. The four week moving average was down a bit to 555,250. Continuing claims are still very high at 6.2 million as people find jobs so hard to get they are staying on the unemployment role much longer than usual. With claims a bit better, some are hoping for a better number on Fridaywhen the Bureau of Labor Statistics releases the official unemployment reading. Consensus is for a loss of 350,000 jobs and an unemployment rate of 9.7%. Equally important will be the length of the work week (33 hours last month — the lowest on record) and average hourly earnings (flat last month).

Both the Bank of Englandand the European Central Bankleft interest rates unchanged at .5% and 1% respectively. Don't expect any rate changes when the Federal Open Market Committee meets next week. What we will be looking for would be any changes in their feeling about the economy and the level of quantitative easing being employed.

But I don't expect any new news.

American Express says their level of card delinquencies is better. If that were to prove to be an industry wide trend, our Carole Berger thinks estimates for card companies could prove to be too conservative, but we need more data points. Interesting to think about though.

Can it be? Reuters quoted Deutsche Bank as saying that half of all mortgages will be under water by 2011. If that is correct the stock market will need to rally even more to offset the continuing decline in consumer net worth. Right now, net worth has recovered nicely with the 50% rally in stocks, but if real estate were to continue to decline such that 50% of homeowners owed more on their mortgage than the house were worth then we shouldn't hope for ant help from the consumer in digging out of the hole we are in.