Don't Expect a Second Half Rebound

The general thought process of most analysts argues for a stronger second half of the year. I am not so optimistic for the following reasons:

1.) Gas prices will not stay low. As I mentioned in today's oil market analysis, there is little hope for a continued period of low oil prices; the fundamentals of the market are simply far too bullish. Barron's article on the oil market last week summed up the basic situation:

Despite the recent 20% decline from April highs, new highs on crude, heating oil, diesel fuel, jet fuel and gasoline seem likely over the next 12 months. Following some further easing over the summer, the second leg of the long-term bull market in petroleum–the first occurred in 2007-08–probably will begin this fall.

As oil producers' spare capacity gradually declines to worrisome levels, the average monthly price could reach a record $150 per barrel by next spring, with spikes to $165 or $170. With this, $4.50-a-gallon gasoline will become the norm. That will put a huge dent in consumer wallets, while ramping up the desirability of fuel-efficient cars.

The continued short-term easing of oil prices should benefit the economy over the summer, only to exact a much larger payback later. The projected oil shock of spring 2012 will hurt the economic expansion, but not kill it, pruning about 1.5 percentage points from quarterly growth in real gross domestic product.

As such, I believe the choke hold of high oil prices will continue to exact growth concessions from the economy.

2.) The EU situation is continuing to lower overall confidence. Earlier this week, Portugal's debt was cut to junk status and there is already talk of problems with the Greek bail-out package. At this point, there is little reason to see this situation getting noticeably better -- that is, better to the point where it is no longer hurting overall confidence. Add to that the ECB is now hawkish on interest rates, and you have an added economic braking mechanism to contend with.

3.) The jobs market in the US continues to fluctuate around 9% unemployment, and initial new claims remain above 400,000. Washington is acting like its 1938 all over again, which will do nothing but hurt economic growth in the short-run as well as negatively impact confidence in the economy. Simply put, Washington is doing literally everything wrong right now, and the net result will be diminished growth.

4.) As I pointed out yesterday, Brazil now has an inverted yield curve, India's is flattening and China is raising rates and reserve requirements to lower overall inflation. In short, the central banks of the economies that drove world wide growth are raising rates to slow their respective economies. This will add to lower growth in the US, which has relied on exports to drive the last two years of expansion. We've already seen a wave of PMI slowdowns across Europe as a result.

5.) With the end of QEII, the largest buyer of treasury securities has left the market. The end result has been rising interest rates.

I seriously hope my analysis is wrong on this -- and if you see bright spots, please let me know. I just don't see any right now. At best, I see a muddling growth fluctuating around 2%.