Market Briefing July 2007

Market Briefing July 2007
Overview

The economy still shows signs of sluggish growth, despite gains in productivity, earnings and easing of the jobless situation. The signs are generally the same: a weak dollar combined with continuing problems in the housing sector – coupled with a fragile bond market, and weak consumer spending has fuelled less than stellar results. Some key current economic conditions are summarized below:
· The Institute for Supply Management (ISM) report which covers manufacturing health posted a reading of 56.0, its best level since early 2006. The inflation component of the report noted slightly tamer prices. After holding at or below a breakeven reading of 50 on a number of occasions late last and early this year, the headline index steadily improved during the second quarter of 2007, so factories have been coming back to life after a rough-and-tumble period. That said, Factory Orders put in what could be called a better-than-expected showing in May, even though that figure was a decline of 0.5% in orders recorded for the month. Market watchers were expecting for a much larger falloff after a trio of positive readings covering February, March and April.
· Signals of stronger economic growth pushed money into stocks at the expense of bonds, and mortgage rates closed the week on an upward trend.
· After testing a 5% level early in the week, the benchmark 10-year Treasury bond made its way back to as high as 5.20%
· Weekly claims for unemployment benefits nudged higher a few weeks ago, only to settle back to more familiar ranges. During the week ending June 30, some 318,000 new applications for benefits were filed. Low and steady was the trend in layoff announcements recorded by Challenger, Gray and Christmas, who totaled some 55,726 announced job cuts in June, down from over 71,000 in May. Although the Fed continues to look for slackening in labor markets, so far, none has revealed itself.
· The surprise jump in Consumer Confidence Improvement will be difficult to sustain. June retail sales tumbled, especially in the automotive sector. The nation's consumers, uninspired by this season's fashions and rattled by high gas prices and the weak housing market, shopped gingerly last month, extending the misery of retailers who have struggled with a spending slowdown since February.
· The nationwide economy has exhibited below trend GDP growth for the last two years (trend growth is 3%). This marks the longest recorded period of below-trend growth without a recession, according to the forecaster. Housing was the primary culprit for slowed growth, decreasing net GDP growth by 1%. Despite decreasing residential construction and declining housing prices, strong growth worldwide is keeping the U.S. economy afloat. Rapid GDP growth worldwide coupled with lower U.S. currency value has resulted in an improving net export rate. Export growth and business investments should keep the economy out of recession until mid-2008, when GDP growth returns to an on-trend rate of about 3% and housing starts to recover.
· America's trade deficit rose to its second highest level of the year, reflecting higher prices for foreign oil and a continued appetite for Chinese goods despite this year's recalls of tainted products.