Cross Currents in the Economy and Financial System

July 16 - Cross currents in the U.S. economy are particularly evident today and illustrate why it is so difficult to figure out where the economy is heading.

On the plus side:
- Labor markets are better - that is, less bad. The weekly unemployment claims data released today by the Labor Department suggests that jobs losses remain very large, but that deterioration continues to slow. On a four week moving average basis, initial claims rose by 584,500, slightly less than last week's number.
- Some financial firms look better. Profit reports for Goldman Sachs and JPMorganChase are positive, although weakness is apparent in specific business lines (eg, JPMorgan's consumer business). While these reports are good signs, we are still not out of the woods. "Legacy" assets (mainly "toxic assets) are still being held on the books and reporting rules have been relaxed for the time being.
On the negative side:
- A new financial sector shock is possible this week. Although the economy appears to be gradually on track for recovery, it remains extremely vulnerable to any new development (ie, a shock from the financial sector).
Press reports suggest that federal regulators are leaning toward allowing the mid-sized consumer finance firm CIT to fail, if it can't come up with a viable business plan acceptable either to regulators holding the taxpayer purse or to potential market financiers. CIT has never recovered from its aggressive move into the subprime and student loan markets. Some experts have reasonable fears that CIT's failure could present a second large shock to the financial system and economy (Lehman's failure being the first), but with a greater impact on the retail sector and other small businesses, which are already struggling. A CIT shock would be felt more immediately in Main Street than most previous financial sector shocks.
The administration:  stimulus must be sustained. With conditions remaining weak and the February stimulus package still ramping up, to work its way through the economy in the second half of the year, Secretary Geithner stated today that it is too soon to withdraw stimulus. He cited the lesson of the 1930s when a premature unwinding of stimulus and tightening ended the recovery and prompted a second recession.