The markets reacted negatively today after the announcement of a rise in jobless claims to top the magical 500,000 figure for the first time since 2009. The bad news is largely offset by the increase in export/import activity and by the positive earnings reports in the first half of the year.
The earnings reports in the first half of 2010 were encouraging and most US companies reported better than expected earnings per share (EPS) and better revenue figures. That is a positive sign for the American economic engine although that data should be interpreted carefully.
Companies have reduced their revenue projection for the remainder of the year in light of a slower than expected economic growth.
GDP in the US grew by 3.9% and 2.4% in the first and second quarter respectively. Analysts and economists predict a growth of 1.5% for the remainder of 2010.
The figures may not be encouraging, but when placed within the global economy follow the overall trend of a slower global growth picture.
The encouraging factors, which are often overlooked by the financial markets, are the increase in import and export activity among the major trading partners i.e. US, China, Japan and Europe.
The figures in the US show a healthy increase in imports which is a sign that companies are replenishing their inventory because of higher consumer demand. US exports on the other hand saw a stagnation or minor decline due to less demand overseas.
The second positive news can be found in an increase of US productivity which is to be viewed as encouraging news starting in 2011-2012.
The liquidity of the exchange of goods and services across the globe is a good barometer to predict the future health of our US and global economy.
The main reasons for the slower than expected growth may be multiple, but one aspect that causes such is primarily the lack of solvency with most trading partners, including the US.
Imagine your town or city as a local economy and a small picture of global trading.
A foreign visitor walks into your town and wants to borrow the keys to all the luxury suites of your local resort. The owner of the resort hands over the keys in exchange for a $1,000 security deposit.
The owner accepts the payment and visits the local fish store where he has an outstanding invoice for the same amount because of food deliveries he ordered but remained unpaid.
The fish store owner in turn uses the money to pay the boat captain and settles his unpaid bill.
The boat captain runs to the resort and settles his unpaid bar tab with the owner.
The visitor returns to the reception and hands back the keys to the owner upon which he receives his $1,000 back.
The above scenario is an example of trade. Money flowed from one trading partner to the other and the initial security deposit created liquidity. However, what remains unchanged in the aftermath is that the solvency of neither partners was affected, independent of the increase in liquidity.
The same scenario influences international trade as well.
The liquidity is present and healthy but until the solvency issue is resolved, growth will remain slow but still positive.
Written by Nick Doms © 2010, all rights reserved