Economic Halftime Report

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It does not seem possible that we are halfway through the 2011 economic season. The first six months were a siege of black swans or unusual events ranging from oil issues creating social unrest in Egypt and Libya, to the unfortunate natural and nuclear disaster in Japan, and the constant threat of sovereign debt issues in Europe. Each event in itself and the cumulative impact has raised concern about the health of the U.S. and global economy.

The agricultural community is doing quite well because of the emerging nations’ demand for food, fiber and fuel; continued growth in ethanol; low value of the dollar; and, of course, low interest rates. However, the general economy has severe headwinds. First, housing starts are only half the number of a normal market. This is due to inventory backlogs, but also the aftermath of the first-time homebuyers’ incentives, high unemployment and the real income loss of purchasing power due to stagflation hitting the working sector.

Speaking of high unemployment, the reported rate is currently 9.1%. This represents the longest period in recorded history that unemployment has remained above 8%. Uncertainties in Washington on the political side, increased regulatory burdens and a movement toward automation by businesses have been the perfect brew for a jobless recovery.

Economic indicators such as the Purchasing Manager Index (PMI), the Conference Board’s Leading Economic Index (LEI), and the LEI Diffusion Index are forecasters of the economy. They have been on a positive trend over the past 12 months, but the PMI has now been decreasing since March, and the LEI took a dip in April’s monthly report, but rebounded in May. It will be interesting to determine if this is a short-term dip or if these indicators will continue on an erratic path throughout the summer and into the fall. Given this information, the Federal Reserve is likely to take a wait-and-see attitude concerning rate increases and other programs to stimulate the economy.

Overall, the economy would be graded a C, which at best is an inflated grade due to the programs used to jumpstart the recovery after the great recession. It should be an interesting summer and fall as we move into the national election cycle.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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