Fundmastery Blog

Kurt Brouwer September 7th, 2007

Economy Coming or Going?: Economic growth for the second quarter was revised upward to a real annual rate of 4%. That’s the good news. However, since then the whole subprime lending mess has laid waste to jobs in construction, lending, finance and others sectors. So, we really do not know where the economy is going right now. Will it continue the second quarter’s solid growth or will the credit crunch slow everything down? The economic outlook for 2007 is uncertain, but growth will certainly be lower than last year.

Oil Prices: Not much has changed in the energy markets. The trend towards higher prices for oil continues, with oil bouncing around $76 per barrel.

Interest Rates: A cut in the Fed funds rate is highly likely when the Federal Reserve board meets next Tuesday. The poor jobs reports (see below) for August is likely to impel the Fed to take action.

U.S. Housing Industry Remains Sluggish: The subprime lending mess exacerbated an already weak housing sector. Housing starts have fallen quite a bit around the country. Prices on residential real estate have softened in many markets around the country. Also, the mortgage industry has suffered as companies specializing in sub-prime lending (loans to borrowers with credit problems) have been hit very hard with defaults and credit problems.

U.S. Unemployment: By a statistical fluke, the unemployment rate remained at 4.6%. It is almost certainly go up next month and may hit 5% soon. Job growth was actually negative for the first time since 2003, with 4,000 jobs lost.

U.S. Budget Deficit: For the 2007 budget year, which ends on Sept. 30, the Congressional Budget Office is projecting a federal deficit of $156 billion for fiscal year 2007, which end this month.

In short, we have a very mixed outlook right now. Lots of negative news popping up, particularly in the jobs market. Unemployment is growing, however it is still very low by historical standards. Overall, the outlook is uncertain. The economy picked up steam in the second quarter, but the subprime lending mess seems to have put a halt to the upward momentum.

The next next 10 days will be a time of ‘wait and see’ as the financial markets wait to see what the Fed does. However, with this jobs report, I suspect the Fed will have to act and the financial markets may well perk up in advance of the Fed’s next scheduled meeting, which is on September 18th.

• Economy , Geopolitics , Money
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