Profit Confidential (www.ProfitConfidential.com), an e-letter published by Lombardi Publishing Corporation, a 28-year-old consumer publisher that has served over one million customers in 141 countries, is cautioning that while higher interest rates are necessary to combat inflation, even a small rate hike will negatively impact an already weak U.S. economy and threaten a sustainable recovery.
“Weak economic data from the housing sector and broader U.S. economy illustrate that the recovery has not yet taken hold,” says economist and lead contributor Michael Lombardi “While this alone can hinder future growth, the U.S. economy could be derailed should the Federal Reserve raise interest rates, which it has hinted it will do in 2015. But can the U.S. economy withstand an interest rate increase of even one percentage point?”
Lombardi explains that the U.S. housing market remains fragile; while the high-end housing market is doing well, the general market is weak. In fact, mortgage applications are tumbling. In the second quarter of 2014, Bank of America Corporation announced mortgage originations declined 49% year-over-year, JPMorgan Chase & Co. saw its mortgage originations fall 66%, and Wells Fargo & Company reported a decline of 62%. Despite the ultra-low-interest-rate environment, people aren’t taking out loans to buy homes. (Sources: “Bank of America Reports Second-quarter 2014 Net Income of $2.3 Billion, or $0.19 per Diluted Share, on Revenue of $22.0 Billion,” http://newsroom.bankofamerica.com/press-releases/corporate-and-financial-news/bank-america-reports-second-quarter-2014-net-income-23-b; July 16, 2014; “JPMorgan Chase Reports Second-Quarter 2014 Net Income of $6.0 Billion, or $1.46 Per Share, on Revenue1of $25.3 Billion,” http://investor.shareholder.com/jpmorganchase/releasedetail.cfm?ReleaseID=859636; July 15, 2014; “Wells Fargo Reports $5.7 Billion in Net Income Diluted EPS of $1.01, Up 3 Percent From Prior Year,” www08.wellsfargomedia.com/downloads/pdf/press/2q14pr.pdf; July 11, 2014.)
“It’s not just the housing market that is weak. The entire U.S. economy is soft, masked by an artificial stock market rally and skewed ‘official’ government statistics that don’t provide a true picture of the unemployment situation or inflation,” Lombardi adds. “Microsoft Corporation said it plans to cut almost 18,000 from its workforce, and there are already 1.57 million workers in the U.S. who have been laid off.” (Sources: Molina, B., “Microsoft to cut up to 18,000 jobs over next year,” USA Today, July 17, 2014; www.usatoday.com/story/tech/2014/07/17/microsoft-job-cuts/12772901/; “Layoffs and Discharges: Total Nonfarm,” Federal Reserve Bank of St. Louis web site, July 8, 2014; http://research.stlouisfed.org/fred2/series/JTSLDL.)
Manufacturing is becoming a thing of the past. The industrial capacity utilization rate in America is still below 80%, coming in at 79.1% in June. Unless Silicon Valley continues pumping our technology companies at a very fast pace, the job absorption rate in this country will continue to decline. (Source: “Industrial Production and Capacity Utilization,” Board of Governors of the Federal Reserve System web site, July 16, 2014; www.federalreserve.gov/RELEASES/G17/current/default.htm.)
In June, the Consumer Price Index increased to 2.1%, with gasoline prices accounting for the majority of the 0.3% month-over-month increase. Using older reporting methodologies (in place before 1980), the U.S. inflation rate is running closer to six percent.(Sources: “Consumer Price Index – June 2014,” U.S. Bureau of Labor Statistics web site, July 22, 2014; www.bls.gov/news.release/cpi.nr0.htm; “Alternate Inflation Charts,” ShadowStates.com; www.shadowstats.com/alternate_data/inflation-charts.)
“A hike in interest rates would poison the U.S. economy,” Lombardi concludes. “But with inflation getting out of hand, especially food prices, higher interest rates might be necessary to tame inflation. And that will be the proverbial last nail in the coffin for an already weak housing market and broader economy.”
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