Monday, May 24, 2010

Things Are (Sort of) Looking Up

In the midst of a stomach churning stock market correction, Dr. Nouriel Roubini predicts another 20% down.  Why I think he's wrong (and why I think the moniker "Dr. Doom" fits him well).
April Jobs Report
After losing over 8 million jobs, an upturn of 290,000 may not sound like much.  But, our April jobs report sends a strong signal that business recovery is gaining a firm foothold.  As businesses continue to expand, we are seeing signs of stability in the housing market, as well as signs that the US consumer is beginning to spend again.
Type of Recovery
Generally, after a deep recession, business recovery bounces back at the GDP rate of 5% or more for several quarters, releasing pent-up demand.  Not so this time, it appears.  With a slower job recovery similar to that after the deep recession in the early 1980s, and significant housing inventories from buyers who should never have been owners in the first place, economic indicators point to a sustained, but muted recovery of 3%+ for the remainder of this year into 2011.  More of a "U" shaped recovery than a "V" is likely under current conditions.
In addition, exports to Europe, where the declining value of the Euro to the Dollar make our goods more expensive, will dampen, but not eliminate US export growth.
Economic Indicators
This year started with a respectable 3.2% GDP growth in the first quarter.  Most strength was in manufacturing and consumer spending.  Business equipment spending was a moderate contributor. 
Challenges to growth are in business real estate, which was very overbuilt.  With the slowdown during the recession, it will be a while before businesses will grow into current vacancies. 
Other challenges remain in residential real estate, which, while stabilizing, is far from growing at normal levels, and exports, which we mentioned before, will be subdued in the European region because the dollar's strength will make them more expensive. 
In 2011, as the European situation stabilizes, improvements in exports will likely follow. 
Subdued, for now, as residual effects of the recession, including high unemployment, keep demand low.  In the future, there are concerns that high levels of public debt will compete with private borrowing when the economy regains its footing.  Look to the current European problems to see how increasing rates for borrowing fuels higher costs both in government and the private sector, resulting in higher inflation.
That's down the road, but a grave concern nonetheless.
Business Income
One of the residual benefits of a recession is the cost cutting that businesses must do to retain profitability.  As consumer demand increases, these lean businesses will enjoy profits based more by sales than cost cutting. 
Stock Market
The so-called easy money has been made.  The brave investors who bought well run companies in March, 2009 have enjoyed a 70%+ gain.  Lately, prior to the recent correction, investor sentiment was very high (a bad sign), and price earnings ratios were nearly 14 times future earnings, slightly lower than the 15.8 long term average, but nowhere near the bargain prices in early 2009.  The recent correction provided a slightly better buying opportunity, but with a sub-par growth projection into 2011 and 70% gain from its lows, investors are understandably wary.
We're pointed in the right direction, to be sure.  Some caution is, however, warranted. 
A further 20% correction?  I'd have to be nicknamed Dr. Doom to say that.  And, I follow the data.  Not a nickname.

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