US Economy

The top financial story this past week was the slowing U.S. economy. This tries to explain the drivers for this economic slowdown and the path forward. First is the paragraph from Vanguard. At the end is some trivia for your enjoyment.

Vanguard

Consumers and investors looking for good news this week were largely disappointed as the effects of the tragic natural disasters in Japan reverberated through the global economy. The U.S. unemployment rate ticked up, job creation was weak, manufacturing growth slowed, and consumer confidence slid—even before the latest releases. For the week ended June 3, the S&P 500 Index fell 2.3% to 1300 (for a year-to-date total return of about 4.2%). The yield of the 10-year U.S. Treasury note fell 8 basis points to 2.99% (for a year-to-date decrease of 31 basis points).


What is Going on with the Economy?

The data this week showed that job growth for May was not as good as anticipated. While job growth was good in the service sector it was not as strong in the manufacturing sector. I had 3 interactions this week that I think will answer the question.

My first interaction was with a very large global company that supplies commodity grade plastics around the world. The information was that business is going very well, even better than last year. Combining this information with the growth in the service sector suggests that the overall economy is growing more than is being reported in the press.

My second interaction concerns a company that makes plastic in the U.S. and Japan. Because of the March 15th earthquake and tsunami in Japan, the ability to supply a high end plastic used primarily in the U.S. has indeed hurt output and impacted hiring of people for the companies that use this plastic. If Japan is the reason for reduced hiring what is the timing for when things will get back to normal?

It takes about 6 weeks by ship from receipt of order in Japan to arrival in the U.S. So the March 15th tragedy in Japan showed up about May 1st, giving a full month of impact. It has been reported that Japan GDP lost about 16% because of this event. It was reported that industrial production in Japan is increasing with about an 8% increase in May and an 8% in June. By the end of June, Japan will essentially be back to normal production, an extremely fast recovery. This means that by the end of August the U.S. manufacturing sector should also be back to normal. Because of pent-up demand related to this shortage this means that September through December should have higher than normal manufacturing output.

The laat interaction has to do with the impact on manufacturing from the recent record of tornadoes in the U.S. Orders for infrastructure related products have started in late May. The rebuilding of these areas, as insurance companies settle claims, is a positive for manufacturing companies and the U.S. economy that is starting to show up now.

Bottom Line: The rebuilding of the areas hit by tornadoes is a short-term positive for the U.S. manufacturing sector and the U.S. economy. Japan returning to normal about the end of June is a longer-term positive for the U.S. manufacturing sector and the U.S. economy. The recent drop in the U.S. stock market represents a buying opportunity. Please do not listen to all of the doom and gloom in the news.

Trivia

• Antarctica is the only land on our planet that is not owned by any country. Ninety percent of the world's ice covers Antarctica. This ice also represents seventy per-cent of all the fresh water in the world. As strange as it sounds, however, Antarctica is essentially a desert. The average yearly total precipitation is approximately two inches. Although covered with ice - (all but 0.4% of it) - Antarctica is the driest place on the planet, with an abso-lute humidity lower than the Gobi desert.

• The smallest sovereign entity in the world is the Sove-reign Military Order of Malta (S.M.O.M.) It is located in the city of Rome , Italy and has a land area the size of two tennis courts. As of 2001, it has a population of 80. This is 20 less people than the Vatican. It is a sovereign entity under international law, the same as the Vatican.