We have been trying at the California Business Minute to publish a six month review,
but given the events of the past week, it is apparent and even more important to do
a week in review given the business and economic activity of the week August 7 – 13.

The week began with news on Monday, that the credit rating agency Standard and Poor’s
would downgrade the US creditworthiness from AAA rate to AA+.  This action, coupled
with investors concerns of European bank solvency, fears created by rumors of a
possible new recession in the U.S. and an announcement by the Federal Reserve that it
would keep interest rates low for two more years because of slowing growth upset the
stomachs of Wall Street investors. All of this news and rumor would be joined by a
variety of reports, from the widening of the nation’s trade balance to a lack of
consumer confidence.  However on the flip side, there was a positive retail sales
report, better employment news and strong earnings from a technology bellwether – Apple. 

Additionally, the California Supreme Court announced that they would hear the case against
state legislative action that is trying to dismantle the 400 redevelopment agencies in the effort
to use their resources to help balance the state budget.  All of these made for a rollercoaster ride
of a business week in the nation and the Golden State.

Solons vs. Standard and Poor’s
News and rumor may have help rock the stock market and consumer confidence during the
week.  Many believe it was the partisan action of Congress in addressing the debt
limit ceiling and corresponding debt reduction that triggered many of the events during
the week.  

For example, as Congress indolently completed its work before the deadline on August 2,
to raise the debt limit ceiling and to find solutions for debt reduction, the credit
rating agency, Standard and Poor’s would downgrade the US creditworthiness from AAA
rate to AA+.  That brought a quick White House invitation requesting the credit rater
to explain their action and to identify their mis-interpretation of the numbers, some
$2 trillion to be exact.  But the rating was downgraded anyway.

Investors worried and the Dow dropped 634 points on Monday, August 8, its sixth-worst
point drop in history as investors responded to Standard & Poor's withdrawal of the
country's AAA credit rating. It was the first downgrade of U.S. government debt in
history. The Dow would rise 429 points on Tuesday, August 9, one of the top 20 largest
increases in history for the Dow.  However it would plunge 519 points on Wednesday,
August 10, one of the worst points drops in history for the Dow. It surged 423 points
on Thursday, August 11, following a better-than-expected drop in applications for
first time unemployment claims. Again, 423 points is one of the top 20 largest
increases in history for the Dow. It would end Friday, August 12 with a 125 point gain.
Friday capped a week when the blue-chip index had four 400-point swings in a row for
the first time in its 115-year history.

Meanwhile, the University of Michigan’s Consumer Confidence Index dropped.  Consumers
were pessimistic about their own finances and the economy. The measure of consumer
sentiment fell to a 30-year low. This drop may have been more of an editorial with
the displeasure of Congress and its vote on the debt limit ceiling and budget
reduction action by those surveyed, than a true gauge of their confidence.  Again,
another acid-indigestion inducing event.

The Good News for California and the Nation
There was good news. Amidst the rollercoaster ride on Wall Street, Cupertino-based
Apple was playing tag with Exxon as the world’s most valuable business. On Tuesday,
Apple’s valuation whizzed by Exxon in wild day of trading.  However, by the end of
the day, Apple’s market cap was $346.74 billion and Exxon’s was $352.9.

Meanwhile, on Thursday, the Labor Dept released its weekly first time unemployment
claim numbers for the week ending August 6.  The numbers came in under 400,000
illustrating fewer demands for unemployment benefits and continued good news for the
labor market. Wall Street was quick to acknowledge the news as the Dow surged 423
points.

Meanwhile, continuing to add to the good news, Thursday, the US Dept of Commerce
released trade balance activity. Nationally, the trade balance widened.  However,
for California, it continued its growth as exports grew above $77 billion and
imports over $165 billion for the year through June.

The State Supreme Court announced on Thursday that it plans to hear a case
challenging state legislation that would divert $1.7 billion from the 400
redevelopment agencies across the state.  The case was brought before the
Court by the League of Cities, the California Redevelopment Association and
two redevelopment agencies, Additionally, the Court identified that agencies
could continue to operate through their decision, however, they are barred
from starting any new projects, issuing bonds or purchasing or transferring
any property. Officials from the Court have asked both parties to prepare as
they will begin to hear the case shortly with a timeline for a decision by
middle of January.  This was good news for local government and the redevelopment
community. The state’s key economic development tool may still have life left.

Two reports were released on Friday that would have an impact on the market.  The
first was the University of Michigan Consumer Confidence Index.  Analysts and
economists had forecasted a reduction in the Index, but not such a significant one. 
The Index fell from 63.7 to 54.9. But, apparently Wall Street didn’t give the Index
much credence. It instead focused its attention on the increase in retail sales that
jumped 5 percent according to a Department of Commerce report.  If only Wall Street
had paid attention to the National Retail Federation that released data illustrating
that the nation’s retailers hired 26,000 in the month of July, claiming they are
doing their part to help the economy, maybe some of the gut wrenching events would
have been diminished.

Oh my, what a week it was.

 
Tim Johnson
California Business Minute