If U.S. President Barak Obama fails to win a second White House term this November, pundits will surely point to last Friday’s U.S. employment report as the moment things began to turn sour for the Democrats in Washington. The consensus among economists going into the release of the May report was that nonfarm payrolls would be up a net 150,000 jobs for the month. The actual number came in at 69,000, a major disappointment. That pushed the unemployment rate up from 8.1% to 8.2%. The rate had not risen since June 2011.
It was a tough day for U.S. investors. The Dow Jones Industrial Average dropped more than 1.9% on Friday. The broader S&P 500 Index ended the day down almost 2.2%. The Nasdaq Composite fell almost 2.5%.
Was that an overreaction? Time will tell, of course. What’s clear though is that the momentum Obama appeared to have created in recent months came to an abrupt stop on Friday. I called John Waggoner, a personal finance columnist at USA Today on Monday to learn more about what’s happening.
Waggoner told me there are six things Canadians need to know about today’s U.S. economy:
- The U.S. is still a good bet. “It’s a bizarre period for investors,” he said. “Even though the economy is slow, [corporate] profits are at record levels, cash is at record levels, interest rates are at record lows and tax rates are low. By all traditional counts, it should be a pretty good time to be in the market.”
- Residential real estate is at various stages of recovery across the country, but homeowners still lack confidence. There’s a lot of nervousness. People are afraid to put their houses up for sale because they aren’t confident about the prices they’ll get. Depressed home prices are hard to live with, especially if yours is worth less than you owe on it. “It limits your ability to move somewhere to get a better job,” Waggoner said. “Nobody really wants to sell their house and have to write a cheque to the bank.”
- Few Americans have embraced frugality. “I don’t see a lot of austerity among most people,” he told me. “I still see a lot of flat-screen TVs, a lot of decent vacations and things like that.” Mostly, people are paying down credit card debt. But we can count on the U.S. consumer making a comeback eventually.
- The manufacturing comeback is real, and domestic energy production is part of the story. “The U.S. is undergoing an energy renaissance,” said Waggoner. “We are the fastest-growing oil producer among non-OPEC nations.” This is starting to make the U.S. look attractive to manufacturers again. It’s early days, but there’s reason for a bit of hope.
- The so-called fiscal cliff might really make a mess of things. Two major political problems face Washington on Jan. 1: Obama’s extension of President George Bush’s tax cuts expire and a series of automatic budget reductions kick in that will see more than $1 trillion slashed over a 10-year period. “None of this is conducive to growth,” explained Waggoner. And the window for a political solution is almost impossibly small. “They have from Dec. 6 to Dec. 31 to fix everything, because they’re probably not going to do it during an election period. I don’t have a great deal of faith. Oh, and the debt limit is coming up too.”
- Thankfully both President Obama and Mitt Romney are moderates. “They may not admit it, but I think they are,” Waggoner told me. But there’s only so much the White House can do. The two parties are so entrenched in their positions that compromise is all but unachievable. So political risk is very much an issue for U.S. investors. And on that point, Waggoner is pessimistic. “The U.S., at least as far as tax and fiscal policy go, has not made any extraordinary sacrifices … I don’t see any willingness on anybody’s side to do things for the greater good.”
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