Wednesday, June 29, 2011

The Economic Ball's In Washington's Court -- And That Ain't Good

As I see current economic events, the real story actually lies in Washington.

First, recent economic news has been poor. It started with high commodity prices squeezing margins and consumers. At the same time, we saw international growth engines India, Brazil and China raise interest rates and reserve requirements to slow their economies, thereby also muting the increased demand caused by their growing economies. In the US, consumers have switched focus from mass consumption to paying down debt and a frugal approach to buying, making the slowing demand from India and China that much more important as it creates a slight vacuum for macro-level, international demand.

This was followed by the shock of Japan's earthquake, which more or less completely threw-off global supply chains for consumer electronics and autos. This added further downward momentum to the manufacturing cycle, which was one of the strongest ares of the domestic economy. At the same time, the budget talks were then getting underway with every event being reported as if the situation were in a cage match.

In short, all action appears to be on hold until Washington solves (and I use that word in the most liberal manner possible) the current budget impasse. As I pointed out yesterday, this is creating a tremendous amount of uncertainly as both possible "solutions" offer little to no real help for the economy in the short-run. As such, I think most major economic players are moving into a disaster mentality, conserving capital and putting all major plans on hold.