Sunday, May 1, 2011

A U.S. economic update: have the markets and economic fundimentals diverged??

During a press conference last week, Federal Reserve Chairman Ben Bernanke said "unemployment remains quite high, particularly among minorities, the young and those with less education," and "the foreclosure rate remains very high, and many homeowners who have avoided foreclosure find themselves 'under water". Additionally, the U.S. Commerce Department reported that economic growth dropped to 1.8% in the first quarter - down from 3.1% during the fourth quarter of 2010; and the U.S Labor Department reported that unemployment claims increased for the week ending April 23.

MY TAKE: The forward outlook will likely be driven by 1) the direction of oil prices (the Fed believes the current upward trend is "transitory"), 2) how Congress manages budget related issues and 3) the impact of adding 1.8 million homes that are delinquent or in foreclosure into a market where 3.5 million existing homes are currently for sale. Note: As the U.S. Congress debates the budget, debt ceiling and other fiscal issues, please be aware that Federal subsidies, employment and spending have historically been significant contributors to U.S. economic growth. Altering this trend will likely present challenges.

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