Where The Economy Is Headed: Think South. Deep South.

From CNBC

The last month has been a horror show for the U.S. economy, with economic data falling off a cliff, according to Mike Riddell, a fund manager at M&G Investments in London.

"It seems that almost every bit of data about the health of the US economy has disappointed expectations recently," said Riddell, in a note sent to CNBC on Wednesday.

"US house prices have fallen by more than 5 percent year on year, pending home sales have collapsed and existing home sales disappointed, the trend of improving jobless claims has arrested, first quarter GDP wasn’t revised upwards by the 0.4 percent forecast, durables goods orders shrank, manufacturing surveys from Philadelphia Fed, Richmond Fed and Chicago Fed were all very disappointing."

"And that’s just in the last week and a bit," said Riddell.

Pointing to the dramatic turnaround in the Citigroup "Economic Surprise Index" for the United States, Riddell said the tumble in a matter of months to negative from positive is almost as bad as the situation before the collapse of Lehman Brothers in 2008.

Wall Street is having a hard time figuring out what to do now that the U.S. economy appears to be sputtering and yields are so low, Peter Yastrow, market strategist for Yastrow Origer, told CNBC.

"What we’ve got right now is almost near panic going on with money managers and people who are responsible for money," he said. "They can not find a yield and you just don’t want to be putting your money into commodities or things that are punts that might work out or they might not depending on what happens with the economy.

"We need to find real yield and real returns on these assets. You see bad data, you see Treasurys rally, you see all bonds and all fixed-income rally and then the people who are betting against the U.S. economy start getting bearish on stocks. That’s a huge mistake."

Stocks extended losses after the manufacturing fell below expectations in May and the private sector added only 38,000 jobs during the month.

"Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything," Yastrow said. "We’re on the verge of a great, great depression. The [Federal Reserve] knows it.

"We have many, many homeowners that are totally underwater here and cannot get out from under. The technology frontier is limited right now. We definitely have an innovation slowdown and the economy’s gonna suffer."

However, he said he wouldn’t sell stocks.

"Any bears out there better be careful because the dividend yields on these stocks look awesome relative to all the other investment vehicles out there," Yastrow said. "So bears are going to have to find a new way to express their discontent with the U.S. economy."

And here's Robert Reich's take on the whole thing.

The US economy was supposed to be in bloom by late spring, but it is hardly growing at all. Expectations for second-quarter growth are not much better than the measly 1.8 per cent annualised rate of the first quarter. That is not nearly fast enough to reduce America’s ferociously high level of unemployment. The labour department will tell us on Friday whether the jobs situation improved in May, but there has been no sign of a surge in hiring. Nor in wages. Average hourly earnings of production and non-supervisory employees – who make up 80 per cent of non-government workers – dropped to $8.76 in April. Adjusted for inflation, that’s lower than they were in the depths of the recession.

Meanwhile, housing prices continue to fall. They are now 33 per cent below their 2006 peak. That is a bigger drop than recorded in the Great Depression. Homes are the largest single asset of the American middle class, so as housing prices drop many Americans feel poorer. All of this is contributing to a general gloominess. Not surprisingly, consumer confidence is also down.

The recovery has stalled. It is unlikely that America will find itself back in recession but the possibility of a double dip cannot be dismissed. The problem is not on the supply side of the ledger. Corporate profits are still healthy. Big companies continue to sit on a cash hoard. Large and middle-sized companies can easily borrow more, at low rates. The problem is on the demand side. American consumers, who constitute 70 per cent of the total economy, cannot and will not buy enough to get it moving. They justifiably worry that they will not be able to pay their bills, or afford to send their children to college, or to retire. Banks, with equal justification, are reluctant to lend to them. But as long as consumers hold back, companies remain reluctant to hire new workers or raise the wages of current ones, feeding the vicious cycle.

The timing is unfortunate. Foreign consumers will not help much even if the dollar continues to slide. Europe’s debt crisis and embrace of austerity, Japan’s tragedy and China’s fiscal tightening have reduced global demand. At the same time, the federal stimulus in the US has almost run its course. The Federal Reserve is about to end its $600bn of purchases of Treasury bills, designed to bring down long-term interest rates and make it easier for homeowners to refinance. Worse yet, state governments – starved for revenue and constitutionally barred from running deficits – continue to cut programmes. Local governments are now in worse shape, laying off platoons of teachers and firefighters.

Under normal circumstances, this would be the time for the federal government to take bold action to ward off a double dip. For example, it could put more cash in peoples’ pockets while giving employers an extra incentive to hire by exempting the first $20,000 of earnings from payroll taxes, for a year or two. It could lend money to state and local governments. It could launch a new Work Projects Administration (modelled after its antecedent during the Great Depression) to put the long-term unemployed to work on public projects. It could amend the bankruptcy law to allow people to include their prime residences in personal bankruptcy, thereby giving homeowners more leverage to get mortgage lenders to mitigate the terms of their loans.

But these are not normal circumstances. America has been through a devastating recession that poked a giant hole in the federal budget. And with a presidential election coming up next year, both parties are already manoeuvring for tactical advantage. Since taking over the House of Representatives in January, Republicans have focused on cutting government spending and paring back regulations. Their colleagues in the Senate, whose leader has proclaimed his major goal to unseat President Barack Obama, are almost as single-minded. Cynics might suspect Republicans of quietly hoping the economy stays rotten up until election day.

Democrats, meanwhile, are behaving as if they are powerless to affect the economy, even though a Democrat occupies the White House and his appointees run the federal government. They would rather not dwell on the slowdown because they do not want to spook the bond market or add to the prevailing gloom (Jimmy Carter’s ill-fated comment about the nation’s “malaise” during the stagflation of the late 1970s has served as a permanent admonition for presidents to stay upbeat). Democrats are staking their electoral hopes on continuing disarray among Republican presidential aspirants, as well as the Republicans’ suicidal plan to turn Medicare, the popular health insurance system for seniors, into vouchers that would funnel money to private, for-profit insurance companies.

The result is as if Washington were on another planet from the rest of the country (many Americans would argue this is hardly a new phenomenon). The noisiest battle in the nation’s capital is over raising the statutory debt limit – a game of chicken in which Republicans are demanding, in return for their votes, caps on future federal spending while Democrats insist on preserving the possibility of tax increases on the wealthy. Countless budget analysts are combing through endless projections of government revenues and expenditures in five or 10 years. Think tanks and blue-ribbon panels are issuing voluminous reports on how to tame the budget deficit in decades to come. The president, meanwhile, is trying to appear as fiscally austere as possible – keeping a lid on non-defence discretionary spending, freezing the wages of civil servants and offering his own deficit-reduction plans.

Washington’s paralysis in the face of a stalled recovery is bad news – not just for average Americans but for the world. Ironically, it also worsens America’s future budget crisis because it postpones the day when the debt begins to shrink as a proportion of GDP. Yet as the 2012 campaign season looms, the prospects for sensible policy seem to decrease by the day.

Feel good about where we are headed now?