STILL A GRADUAL RECOVERY
The economic recovery continued in May and June, but with a lackluster increase in private-sector jobs. Near-term economic expectations have softened and the risks to the growth outlook have become tilted more to the downside.
Tight credit for small business is one near term restraint on economic growth, but there are other headwinds. While the federal fiscal stimulus has helped support the economic recovery and prevented more substantial weakness in the labor market over the last year, state and local governments have countered some of that impact by reducing spending. Budget constraints are expected to lead to reduced government services and higher taxes at the state and local level over the next several quarters.
Core inflation figures have continued to trend lower. Many investors have worried that the Fed’s accommodative policy and wide federal budget deficit will lead to higher inflation. In contrast, measures of core inflation (which gauge the underlying trend in overall inflation) have been trending lower. Outright deflation, a sustained decline in the overall price level, is seen as unlikely, but low core inflation is likely to continue for some time. There is a large amount of slack in the economy and the pace of growth is unlikely to put much upward pressure on inflation anytime soon.
Federal Reserve policymakers are likely to keep short-term interest rates low well into 2011. The government’s fiscal policy is expected to be less supportive at the Federal Level and restrictive at the state and local level.
The biggest risk to the economic outlook would be a policy mistake (either the Fed raises rates too soon or taxes are raised to early). Fed Chairman Bernanke is an expert on the Great Depression – so the Fed is unlikely to repeat the mistakes of the past.
Individual investors have remained on defense for many reasons, both domestic and foreign. The major market indexes continue to search for the right level to begin consolidation and hopefully recover.
The U.S. economy has started to find its footing, but the indications of a strong rebound remain absent.
Given the recent economic statistics, we remain cautious. In this environment, it is more prudent to manage risk rather than return.
Weekly updates on market and economic conditions are available in the Financial Analysis section of our local website at www.RaymondJamesOhio.com.
Please call if you have any questions regarding this general market commentary.
Sincerely,
Larry Cavalena
Registered Principal
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Opinions expressed here are Larry Cavalena’s not necessarily those of Raymond James Financial Services or any of Raymond James affiliates. Expressions of opinion are as of this date and are subject to change without notice.
Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
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