Strong earnings for the first two weeks of this earnings season have pushed the Dow Jones Industrial Average back into the black for the year. The Dow closed at 10,525.43 last night, up 100.81 points on the day. After falling to below 9,700 earlier this month, the benchmark index has risen 7.7% in July, some 4% of which occurred in the past three days.
Good earnings from Dow components Alcoa Inc. (NYSE: AA), Caterpillar, Inc. (NYSE: CAT), Coca-Cola Company (NYSE: KO), Intel Corp. (NASDAQ: INTC
), McDonald’s Corp. (NYSE: MCD), and United Technologies Corp. (NYSE: UTX) have provided the lift to offset the general doom and gloom over a potential double-dip in the global economy. The headline number new home sales in June, up nearly 24%, certainly helped push the index back to black yesterday.
But consumer confidence remains weak, and today’s new data from the Conference Board is expected to underscore that weakness. The big problem, of course, is unemployment, which has remained near 10% for months now and is not expected to go lower than about 9.5% by the end of 2010. Full employment, an unemployment rate of about 5%-5.3%, is not expected until 2013, at the earliest.
Another overall drag on economic recovery is the low rate of GDP growth. The Federal Reserve has lowered its estimate for growth this year to 3%-3.5%. Even to make that is going to be a neat trick, given that first quarter growth was less than 3% and second quarter growth is not expected to be any better. To hit the Fed target, GDP will need to grow at greater than 4% for the rest of the year — and that’s not very likely to happen.
Worried consumers don’t spend, they save. Demand for goods and services drops, and productive capacity is underutilized. Businesses don’t need to borrow to grow, so banks sit on piles of unused capital waiting for another shoe to drop. People don’t apply for mortgages, even at today’s record low rates, because they’re worried about joining the ranks of the unemployed.
Unless something dramatic happens, there will be no further federal stimulus money pumped into the economy. Without that additional spending, it’s not easy to see any increase in capacity utilization. And without that, the U.S. economy will only grow at a glacial pace, if at all.
That the DJIA is back in the black for the year is good news. But a lot more of the same is needed from other pieces of the economy.
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