U.S. Economy Is In Recession

Robert Hsu, April 18, 2008

Speaking of struggling economies, within the past week, we have received some dire news about the U.S. economy. Last Friday, the U.S. Labor Department reported that employers in the U.S. had cut 80,000 jobs in March. It was the worst cut in five years and marked the third consecutive month of declines.

The jobless rate jumped to 5.1%, the highest since September 2005, from 4.8% in February. And along with big downward revisions to January and February employment, payrolls fell by 232,000 jobs in the first quarter, which is a sharp reversal from the 241,000 gained in the fourth quarter in 2007.

I think this gloomy jobs report clearly shows that the U.S. is in a recession. And U.S. Federal Reserve Chairman Ben Bernanke may finally be on the same page and on the verge of pulling his head out of the sand when it comes the state of the U.S. economy. Bernanke said for the first time that the U.S. may enter a recession. He cited "considerable stress" in the housing, financial and credit markets as the reasons for his pessimism. The fact that Bernanke, who has stayed relatively optimistic in recent months, is 'fessing up to his recession fears tells me that the U.S. economy is in trouble.

However, Bernanke also stated that the central bank is "ready to respond to whatever situation evolves." I expect that the Fed will continue to cut its benchmark interest rate by at least a quarter-point to 2% at its April 29 to 30 meeting. The Fed has lowered the short-term interest rate by 3% since September. That's the fastest reduction of borrowing costs in two decades.

As a result, money supply as measured by M2 (cash, savings, checking and money market accounts), has increased sharply in the past two months. At the current rate of growth, by year-end, money supply will grow by over 20% in 2008. The Fed is sowing the seed for greater inflation later this year, and that will be even more bullish for our commodity stocks.

Despite the negative news about the U.S. economy recently, the NASDAQ and Dow had modest gains recently. For the week, the NASDAQ gained 4.9%, while the Dow added 3.2%. The S&P 500 rose 4.2%, which is its biggest weekly gain in more than two months.

While domestic markets are trying to stay afloat, worldwide stock markets are trying to do the same. Asian stocks mirrored the gains in the U.S. last week, recording their first back-to-back advance since December, as the MSCI Asia-Pacific Index rose 2.2% to close at 144.68. But the index is still struggling, down 8.3% this year on U.S. recession concerns.

Sure, U.S.'s economy is causing a drag on markets around the world. But despite this, there are profitable investment opportunities out there -- you just need to know where to look.

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