President Obama is hoping his $825-billion infrastructure plan will be approved this week, as the situation in the United States and around the world ...
President Obama is hoping his $825-billion infrastructure plan will be approved this week,
as the situation in the United States and around the world is worsening. It is a matter of urgency to get the funds flowing to the economy and stop the hemorrhaging. Yet there is no guarantee that the economic stimulus program will work or how long it will take to turn the economy around. I feel a lot more money will be required to grow the economy.
The key is that consumers must want to spend, but they are saving now, as there is fear of job losses. Each day in the headlines, we are seeing announcements of job cuts. Microsoft Corporation (NASDAQ/MSFT) announced its largest job cut in years and will axe 5,000 workers. Harley-Davidson, Inc. (NYSE/HOG) will cut 1,100 jobs over the next two years. And with the auto sector in turmoil, there could be many more job cuts likely to come. The trend is negative, which will impact consumer confidence going forward, and, if consumers don't spend, the economy will struggle.
But what makes this situation grave is that the weakness is spreading worldwide, with the major economic regions slowing and also dealing with their own financial crisis. The United Kingdom, a key economic region in Europe, is now in a recession. The country's unemployment rate is at a 10-year high of 6.1%. The reality is that we are seeing economic slowing in all of the key global markets, which will make President Obama's job that much harder.
The key region I feel could have a drastic impact on world economies is China. China became the world's third largest economy in 2007 after the United States and Japan, according to Chinese government officials. Investment bank Goldman Sachs predicts that China will become the largest economy by 2040. But the country's GDP estimate for 2008 and 2009 has been steadily falling and is somewhere in the eight percent area depending on the length and severity of the global slowdown.
The economic slowing is evident in China, as manufacturing activity has declined for the past three months. The country's Purchasing Managers' Index in December was 41.2, up from 38.8 in November, but still signaling contraction at below 50.0. The PBOC predicts a recovery in the second or third quarter of 2009, although I feel this is overly optimistic given the global slowing.
China has also been aggressively cutting its interest rates to try to jumpstart the economy and get consumers to spend. Rates have been slashed five times in three months. So far, it may be early, but the reduced interest rates are having minimal effect. But, with the one-year rate at 5.31%, there is room for more cuts.
There are also increasing concerns of deflation appearing in China, which was also the case in Japan during the early 90s when Japan had zero percent rates with minimal impact. In fact, Japan just came out and said it would maintain its interest rate at 0.1%, but added that it fears deflation will surface and be around for the next two years. We have talked about the negative impact of deflation and believe it could occur in the U.S. unless consumer confidence improves.
Profit Confidential
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