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VERSACE: More bad news makes QE3 ‘good’ news more likely

- The Washington Times - Thursday, August 16, 2012

ANALYSIS/OPINION:

There are many types of bad news in the world around us, including accidents, the loss of a job, physical and mental issues, and the loss of a loved one. It's pretty safe to say that no one likes to get bad news.

That is unless you happen to be a trader in the stock market that is hoping for the Federal Reserve to further stimulate the economy come September. For those people, the more bad news we get in terms of the domestic economy, the better because it opens the window even wider for Fed to act once again. Not that past efforts have managed to stoke a tepid economy into a roaring one. With second-quarter 2012 job creation averaging a paltry 75,000 jobs per month and gross domestic product averaging 1.75 percent during the first half of 2012, the economy is far closer to being stuck in neutral than it is moving forward.

While July retail sales were stronger than expected, up 0.8 percent, the recent rise in gasoline prices, up 9 percent in the past month and likely heading higher near term, and the ripple effect associated with the significant move higher in corn and soybean prices, will hit consumer spending in the coming months. Not good seeing as how consumer spending drives nearly two-thirds of the domestic economy.

A quick look at the manufacturing economy shows it is not doing much better. The August Empire State Manufacturing Survey indicated that conditions for New York manufacturers deteriorated. The general business conditions index slipped below zero for the first time since October, while the new orders index was below zero for a second consecutive month. That order weakness echoes the order weakness found in the Institute of Supply Management's manufacturing index for June and July. While manufacturing shipments have held up, manufacturing production is unlikely to keep its current pace without an influx of new orders.

These data points give credence to the recent round of GDP cuts by economists.

Economists surveyed by the Federal Reserve Bank of Philadelphia have reduced their GDP forecasts for the current quarter to 1.6 percent, down from 2 percent. Those same economists also trimmed their expectations for the last quarter of this year and for the first half of 2013. Some simple math reveals that the economists now expect GDP to average 2.0 percent over the next 12 months. That is 20 percent slower than their prior forecasts and means that despite all the measures and stimulus put into place, GDP over the coming 12 months will be on par with that for 2011. So much for moving forward.

If that were the only group of economists that cut forecasts, that would be one thing, but that is not the case. In recent days, the Blue Chip Economic Indicators released survey results of 50 economists, and that consensus calls for GDP growth of just 1.8 percent in the fourth quarter of this year.

Forecasting the economy, however, is much like forecasting the weather -- things can change quickly, making the foundation of the forecast either out of date or off base. This can be a good thing sometimes, but there are times when it's far worse than expected. As we all have recognized, 2012 is shaping up to be more of the latter. Last year at this time, the Blue Chip report predicted that 2012 GDP would come in at 2.7 percent. Two years ago, Blue Chip projected growth of 3.0 percent in 2011, but Bureau of Economic Analysis data showed that the GDP grew at a 2.0 percent rate.

The worse the economic news becomes, the better the prospects for another round of the Fed's stimulus. Just how much good news that really is, I'm not sure. As Albert Einstein said so eloquently, insanity is doing the same thing over and over again and expecting different results.

• Chris Versace is the editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com or follow him on Twitter @chrisjversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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