May 2, 2013 Patrick Oliver-Kelley


U.S. companies have easily beaten expectations for first-quarter earnings, but nearly half of the members of the S&P 500 are yet to announce results and they are unlikely to be as robust. Among the biggest companies yet to report are Dow components Wal-Mart. This has been good enough for investors. Since earnings season began with Alcoa’s report on April 8, the S&P 500 has gained 1.2 percent, and it closed Friday less than 1 percent from its all-time high of 1,593.37 reached on April 11. So far this year, it has climbed nearly 11 percent.

Even though profits have been better than expected, revenue forecasts have declined. Companies are exceeding results on the bottom line because of reduced expenses, and not because of stellar sales. Orders for durable goods fell 3.2% in March after a 5.6% spike in February, largely because of fewer bookings for commercial jets and military equipment. The upshot: the U.S. manufacturing sector is still growing, but at a modest pace with little chance of a sharp acceleration. 

Initial claims for unemployment benefits fell by 42,000, down to a seasonally adjusted 346,000 claims. It was the largest weekly drop since November 2012- an encouraging sign for many analysts, who took it as a signal that recent jobless claims reports, which have been higher than expected, could be the result of fluctuations in seasonal hiring and a modest slowing in the labor market, rather than an outright stall in hiring.

U.S. gross domestic product will expand 1.7 percent this year compared with forecast 2 percent advance..
The U.S.’s fiscal tightening that took effect last month will restrain consumption temporarily. The global economy will expand 3.4 percent this year, compared with 3.5 percent forecast in January. The 17-nation euro area will contract 0.2 percent, unchanged from January, with uncertainty stemming from Italy’s election adding to challenges facing policy makers fighting Europe’s debt crisis.

The road to recovery in the advanced economies will remain bumpy.

U.S. employers added just 88,000 jobs in March, the fewest in nine months and a sharp retreat after a period of strong hiring. The slowdown may signal that the economy is heading into a weak spring. The unemployment rate dipped to 7.6 percent, the lowest in four years, from 7.7 percent. But the rate fell only because more people stopped looking for work. People who are out of work are no longer count as unemployed once they stop looking for a job. The percentage of working-age adults Americans with a job or looking for one fell to 63.3 percent in March, the lowest such figure in nearly 34 years.


In this world of cheap money, the extraordinary has become the norm. The Fed is still printing money and will not raise short rates until unemployment falls to 6.5%, it is now 8%. Japan announced a new phase of monetary easing; bond purchasing will be increased. The Bank of England mandates, tweaks low rates to stay lower longer. The ECB is inching toward greater boldness. The message: Ultra low rates are here to stay. Applied appropriately, cheap money could help the world economy: 1. Boldness pays. 2. Not all unconventional polices are equal. 3. Monetary policy does not operate in a vacuum. The US has used creativity and has raised the odds of its experiments working.

Equity markets around the world have responded with ever higher indices. The effect on output, however, has been muted. Rich world growth is barely over 1% this year, virtually unchanged from 2012. The fear is that low interest rates merely sets the stage for bubbles, distorts financial markets and risks inflation. House prices have been rising. Consumer credit is growing. New car loans are at a six-year high. Corporate investment remains elusive: Businesses have issued new debt, but for paying off old debt or for building up rainy day funds. They are sitting on records amounts of cash. Only in the US is capital spending accelerating.

The head of the IM, Lagarde, says the United States, Europe, Japan and China all need to make adjustments to their current economic policies in order to boost a still-struggling global economy. She said there was a critical need for policies focused on spurring jobs. Earlier this week, the IMF lowered its outlook for the world economy this year, predicting that government spending cuts would slow U.S. growth and keep the 17-nation area that uses the euro currency in recession.

What is unknowable is how recalcitrance of Eurozone conditionality in one country may encourage others. Political contagion is the main risk. Therefore, the Eurozone is quietly adapting its policy and deficit-cutting targets are being relaxed. Germany has acquiesced in higher wages, and seems to be doing more to boost demand. Hopefully, it will agree to extend the repayment maturities for deserving cases. If Ireland and Portugal were able to return to the markets, it would be a boost to confidence.

Rest of the World

While world finance leaders say the global economy has improved slightly this year, they said the outlook for the future was uneven with growth and job creation still too weak. The policy-setting committee for the 188-nation IMF said governments need to act decisively to nurture a lasting recovery and restore the resiliency of the global economy.

But the major economies could not reach a consensus on what policies to follow as they move forward. The G-20 nations did reject proposals to issue hard targets for reducing budget deficits, a victory for the United States and Japan, which had argued for more flexibility.

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