Wednesday, August 3, 2011

It's The Economy Stupid: Economy at 'Stall Speed'

Companies in the U.S. added 114,000 workers to payrolls in July, according to figures from ADP Employer Services. The median forecast of economists surveyed by Bloomberg News called for an advance of 100,000. The data comes two days before a government report projected to show an increase of 85,000 jobs.

There's growing concern that the U.S. economy is faltering and has erased $1.07 trillion in value from American equities in less than two weeks. The S&P 500 plunged 2.6 percent yesterday, its biggest one-day loss in a year and giving the index the longest losing streak since October 2008, in the depths of the financial crisis triggered by Lehman Brothers Holdings Inc.'s bankruptcy.

Pacific Investment Management Co. and BlackRock Inc., which together oversee almost $5 trillion, say the U.S. economy is stalling. Bill Gross, who runs the world's largest bond fund at PIMCO, overseeing $1.28 trillion in investments, and Peter Fisher, head of fixed income at BlackRock, say the Federal Reserve is preparing measures to counter the slowdown. "We're not looking at a recession yet, but we're at a tipping point," Gross said yesterday. "We're at what we call a stall speed in which corporate profits don't grow, jobs aren't created," said Gross.

The U.S. recovery that began two years ago has been losing momentum and there are even odds the nation will slip into a recession, according to Harvard University economics professor Martin Feldstein. "This economy is really balanced on the edge," Feldstein said yesterday. "There's now a 50 percent chance that we could slide into a new recession," he said.

The Fed may arrange a third round of quantitative easing, known as QE3, Gross said. The U.S. economy is "very close to stall speed" and the Fed may need to consider signaling a longer commitment to low interest rates, according to BlackRock's Fisher, who is based in New York.

"I believe the Fed is dusting off contingency plans if the economy does not improve," he said in a report that BlackRock distributed by e-mail today. Fisher worked for 15 years at the Fed Bank of New York, according to BlackRock, which has $3.66 trillion in assets.

U.S. gross domestic product expanded at a 1.3 percent annual rate in the second quarter, after a 0.4 percent pace in the prior period, the worst six months since the recovery began in June 2009, according to the Commerce Department.

U.S. stocks have become a "strong buy" following declines in the past seven days, according to Barton Biggs, managing partner and co-founder of Traxis Partners LP in New York. Biggs spoke on Bloomberg Television's "InsideTrack" with Erik Schatzker and Deirdre Bolton.
Per-share earnings increased 18 percent and sales rose 13 percent among the S&P 500 companies that have released quarterly results since July 11, according to data compiled by Bloomberg.
About 78 percent of the 352 companies have topped the average analyst profit forecast, the data show. The S&P 500 traded at
13.8 times reported earnings, the cheapest level since July 2010.
Yesterday's plunge will be followed by a rebound today, if history is any guide. On the 16 occasions since the beginning of
2010 when the benchmark measure has dropped more than 1 percent and closed near its low of the day, the gauge rose on the following day 81 percent of the time, according to data compiled by Birinyi Associates Inc.

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Michael P. Regan at +1-212-617-7747 or

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