One Month Libor

We're Still in a Secular Growth Period for Hard and Soft ...

By Ben Dickey

The US economy has dramatically slowed in the last four to five months. With the first quarter being revised down to 0.4% growth and the preliminary estimate for the second quarter coming in at 1.3%, the economy is close to stalling ( BEA, 8/26/11 release ). I stated  last month  that the US economy will probably stay slow but still expand at an annual rate of about 2%. Due to the recently released statistics, I now think that the growth rate for the overall economy will be slowing to between 1 ½% to 2%.

Manufacturing is still the one bright spot in the economy, but the latest PMI Index shows it has also been slowing over the last few months. The most recent PMI Manufacturing reading ( ISM, 9/1/11 ) was down slightly, to about 50.6, which is still showing expansion, but at a slowing rate. The parts shortage from Japan caused by the earthquake and tsunami is beginning to ease, which resulted in automotive production expanding in August. Otherwise the slowing would have been worse. Although manufacturing has slowed down, manufacturers’ profit margins have remained stable as commodity costs have eased.

Europe is still in the doldrums due to the overhang of all the sovereign debt problems. The slim one month LIBOR vs. one month Treasuries spread his tells me that the central banks of Europe are backstopping the commercial banks. However, the German people are growing tired of supporting the remainder of Europe. France showed zero increase in second quarter GDP, and Germany is barely expanding. The one bright spot is the developing countries, which are still growing. Their growth has slowed down, but India, China and Brazil are still expanding at a good pace. Indonesia is also growing very well, as are the smaller Asian and African countries.

Oil prices have been very volatile. Even at these historically elevated prices, we still think that the demand for oil will continue. The International Energy Agency lowered their forecast for increased production from Non-OPEC countries for 2012. Saudi Arabia has not been able to meet its 10MM bbl/day commitment, shipping less than that amount recently. This continues to convince me that Brent Oil Prices will average $125/bbl over the rest of this year and move higher next year.  (“IEA Says Economy Risks May Cut 2012 Oil Demand Growth By 60%” Bloomberg, 8/10/11 http://bit.

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