Recovery remains slow

The most recent evidence may point to a longer recovery regardless of who gets elected in the fall. And the impact will be worldwide. An indication of the worldwide effect of the loan problems facing banks is that Barclays may need to raise an additional 9 billion in capital, according to analysts at Citigroup, who also said the British bank could take further write-downs as credit market conditions

The most recent evidence may point to a longer recovery regardless of who gets elected in the fall. And the impact will be worldwide.

An indication of the worldwide effect of the loan problems facing banks is that Barclays may need to raise an additional £9 billion in capital, according to analysts at Citigroup, who also said the British bank could take further write-downs as credit market conditions continue to deteriorate. Citigroup estimated that Barclays would need £6.6 billion of additional equity to reach the same capital position as Royal Bank of Scotland and £8.6 billion to meet the European banking sector average.

On the home front, Merrill Lynch will likely incur $5.4 billion of write-downs in the second quarter, according to Lehman Brothers. Analysts had expected write-downs to range from $3.5 billion to $4.2 billion.

The adjustment to be made by the U.S. to reflect current economic conditions will take quite some time to complete. The historic imbalances in trade and investment that are now reversing themselves will lead to lower growth for the U.S. Finally, the report points to the growth in other countries that will continue to put upward pressure on prices of all types in the coming years. In my opinion, that leads to a lower standard of living for U.S. citizens and a higher standard of living for most other countries. That is a short-term (5 years) problem but a long-term (15 years) benefit.

Personal income posted a strong bounce in May, due almost entirely to the fiscal stimulus. Not all income will be spent, with 30% expected to pay down debt. The problem is that delinquencies for mortgages are still very high and revolving credit late payments are rising as well. There is little to point to for an increase in consumer demand for the rest of this year.

The ISM index posted a level that barely reflects expansion during the month of June. That is the strongest reading since January but still barely indicates growth. Employment and imports remain the two key areas that are depressing the index. On a positive note, inventories have been worked off to keep them in line with sales. As a result, further reductions in production will require further declines in demand. That could appear for the next six months in the auto sector. It remains to be seen if the housing market will end its freefall.

Mortgage applications remain sluggish and significant gains are unlikely as interest rates could increase later this year. The new purchase price is slightly more than 20% below year-ago levels. That will continue to force housing to remain well below historic averages for build rates. The rising cost of materials is further adding to the problem of providing affordable housing.

For the first quarter of this year, home prices are 23% lower than that of the fourth quarter on an annualized basis. The S&P/Case-Shiller index reflects major urban markets, so it is not indicative of the nation as a whole; however, the overall trend nationwide is down and likely to be so for the rest of this year. There remains a significant number of homes yet to be refinanced from the subprime market that will lead to lower prices in the coming months.

Increasingly, we are seeing evidence that the consumer is adjusting their behavior. Depending on your source for data, vehicle miles traveled in the U.S. during the first quarter of 2008 decreased 2% to 5%, compared to the same period last year. This is a swing of nearly 9%, considering the level that would have been in place if higher fuel prices were not in effect. More adjustment is on the way given the outlook for the economy.

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