President-elect Barack Obama was one of the few people that could have restored confidence in the financial markets through the appointment of a Cabinet members that the market trusts and a clearer plan of action for tackling the economic crisis. On Friday, his appointments for Treasury Secretary and the Secretary of State were leaked, sending stocks soaring and according to the Washington Post, Obama and leading Democrats are planning a 2 year fiscal stimulus package that could amount to 5% of GDP. He also named former Treasury Secretary Larry Summers to head the National Economic Council. Summers is Geithner’s mentor and was one of the leading candidates for Obama’s Treasury Secretary post.
With 2 well respected powerhouses on his Economic Team, Obama has a good chance of turning the economy around in late 2009, early 2010. The new Administration is beginning to grease the wheels and the market is liking it.
Q3 GDP Could Fall as Much as 1%
However in order for the gains in the equity and currency markets to be sustained, hope needs to supersede reality because as of Tuesday, the US economy should be in a technical recession. Third quarter GDP numbers are due for release and after contracting by 0.3 % in the second quarter, first quarter GDP growth could fall as much as 1% (consensus is -0.5%). The US economy would not be a stranger to such a deep contraction as growth fell by 1.4% in the third quarter of 2001, 3% in the fourth quarter of 1990 and a whopping 6.4% in the first quarter of 1982.
Existing Home Sales Drop 3.1%
It is no secret that the housing market is in trouble and the latest existing home sales numbers confirm that. Resales dropped 3.1% to 4.98 million rate, which is the lowest since June 2008. The big story however is the drop in house prices, which was the largest on record. The combination of a slowing economy and tight credit markets has prevented real estate from recovering and with the recent layoff announcements, I expect demand to slow even further.
Another Big Bank Will Not Fail
Citigroup was another major uncertainty that made the markets nervous. The US government has announced that Citi will be receiving $20B in cash from the Treasury and $306B of asset guarantees. In return, the US government will receive preferred shares in the bank. This step indicates that the Bush Administration believes that the financial system could not afford another big bank failure which is probably right.
For those of you that are interested, here is a quote from Obama’s radio address on Saturday outlining his Economic Recovery Plan:
“I have already directed my economic team to come up with an Economic Recovery Plan that will mean 2.5 million more jobs by January of 2011 – a plan big enough to meet the challenges we face that I intend to sign soon after taking office. We’ll be working out the details in the weeks ahead, but it will be a two-year, nationwide effort to jumpstart job creation in America and lay the foundation for a strong and growing economy. We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels; fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead.”