Increasing good signs with a caution

The following recent data show positive signs for the economy;

• July orders for big ticket items rose 4.9%
• New home sales in July rose 9.6% over June, the fourth straight monthly increase
• Inventories of durable goods fell in July, a signal that future increases in demand will lead to increases in manufacturing
• In June, the volume of world trade increased by 2.5% indicating perhaps that world trade flows are bottoming out, a signal that economies are recovering
• Manufacturing activity expanded in August ending a year and a half of declines.
  The Institute for Supply Management index rose to 52.9%, its highest reading since June 2007.

While these signs bode well, the question on everyone's mind is whether the recovery is sustainable given the likely weak US consumer in the year ahead. Recessions are usually offset initially with government policies (the Stimulus Package and free flow of liquidity by the Fed) and then as these policies are wound down, the consumer picks up spending and the recovery continues. It is unlikely in the current environment that the US consumer will be as buoyant as in recent previous recoveries. The savings rate has already increased from negative territory to 4.2% in July and may continue to rise into the next year as consumers have become much more cautious.

To continue the recovery will necessitate spending from the rest of the world--and especially from China and India. Fortunately, there are signs that the consumer in both of these countries may in fact help a global recovery and in particular may help the US economy. Recent increases in the demand for laptops and flat panel TVs in Asia, the planned sale of IPhones in China as well as Harleys in India all show the potential of the consumer in Asia to pick up the slack of the US consumer in the recovery. Still, a slow recovery at best remains the consensus of economists.

Leading Indicators up for Fourth Straight Month

The Index of Leading Economic Indicators (see Link on the right hand side of the blog below) rose again in July for the fourth straight month. The rise was less than most expected, however, with consumer confidence still problematic. The recovery will be slow because the consumer is not in a position to lead the growth in spending necessary to boost growth beyond the effects of government stimulus. Between the second quarter of 2007 and the first quarter of 2009, household net worth fell 22%. This decline will have long term repercussions as consumers adjust their expectations of lifetime income downward and along with it adjust their saving upward.

The hope for the economy is that other recovering economies including India, China and surprisingly Japan, bolster US Exports and help pick up the slack.

Good news on the TED spread which is very close to zero right now (see Link below).

Positive earnings reports

According to Thomson Reuters, 77% of the 184 S&P companies have reported earnings above expectations this quarter.

John Chiang California State Controller discusses the State's budget plight

Yesterday, I had the pleasure of addressing a sold out audience along with California State Controller John Chiang at the behest of the Center for Investment and Wealth Management at UC Irvine’s Paul Merage School of Business. The subject was “Economic Outlook: Changing Strategies for Changing Times.” Kudos to John for touting transparency in government and for posting monthly financial reports around the 10th of each month, about the same time that the governor sees it at http://www.sco.ca.gov/. While both John and I addressed some sober realities, the signs that I have been describing on this blog point to stabilization of the economy by early 2010. The issue is that there will unfortunately be a prolonged period of slow growth before the economy returns to a position close to full employment.



A vibrant description of John Chiang's comments by Steve Churm from OC Metro follows below:

July 24, 2009 OC Metro

UC IRVINE ECONOMIC OUTLOOK: GRIM

By Steve Churm

Mr. IOU, California’s cash manager, State Controller John Chiang stood stoically as he listened to his introduction in front of an invitation-only business crowd at Irvine’s Pacific Club. The coat-and-tie gathering had come to hear from the man in the middle of the Golden State’s fiscal fiasco. Four hundred miles north, in the capitol, the governor and legislature were just hours from taking a vote to amend California’s budget and slash $15 billion in spending to close a staggering $26 billion shortfall. In February, left with no other options to keep the state from defaulting, Chiang took the unprecedented step to mail $3 billion in refund IOUs to taxpayers to keep California solvent. Stuck smack in the middle of the governor and state lawmakers, Chiang has been scrambling for months to maintain a $2.5 billion cushion that Wall Street requires to maintain the state’s shaky credit rating and remain fiscally viable as a government. He’s managed the precarious high-wire act so far. But the future is far, far from certain as Chiang soberly shared with the lunch crowd that quickly lost its appetite for dessert once he took the microphone. Scotch, straight up, not coffee, would have been more appropriate at that moment.The plain-speaking Chiang, the son of Taiwanese immigrants, warned that next year could be “dramatically worse” without clear solutions and real courage from Sacramento to make tougher and more painful decisions. Even then, the road to recovery, and the prospect of California operating again in the black, is bleak in the near term. Erasing any doubts of a swift rebound, Dean Andrew Policano from UC Irvine preceded Chiang and told the assembled that it would be 2013 (yes, 2013 … not next year or 2011) before California would see full employment again and a sustained recovery. And when the economy does bounce back, Policano, dean of the Paul Merage School of Business, predicted that Californians could look forward to some combination of higher taxes, higher interest rates and higher inflation.

Many signs point to stabilizing economy

Reports today from the housing market showed an increase in home sales for the third consecutive month. Inventories of unsold homes fell to 9.4 months compared to 11 months in May, 2008. These signals suggest stabilization in the housing market.

Also, the Index of Leading Economic Indicators has now increased for three consecutive months providing additional support that the economy will hit bottom later this year.

Finally, check the TED spread on the right hand side of the blog and you will see that the financial markets are showing signs of strength as well.

Signs of recovery mount

There has been less need to post of late because the media has been providing coverage of mounting evidence that the recovery is on the way. If you consult the indexes on the right hand side of this blog you will find that the TED spread has continued to narrow indicating that financial markets are now almost back to normal levels and are providing the liquidity necessary for growth. Also, the Leading Economic Indicators are also up and are signalling that the bottom is in sight.

Other positive signs: durable goods orders rose and new home prices solidified in May, both indicating that the downturn in the economy is slowing.

Finally, the Federal Reserve decided against adding further stimulus through an expansion in its program to buy Treasury bonds. This action shows that the Fed feels confident that while the economy is not out of the woods yet, further stimulation is not necessary at this time.

Market reacts to continuing good signs

The stock market rose today based on several signs: The Institute for Supply Management indexes show a slowing in the contraction in the manufacturing sector indicating that the downsizing is coming to a close. In addition, the Commerce Department reported that personal spending fell at only .1 percent in April while personal income climbed .5%, primarily due to increases in unemployment insurance benefits and Social Security payments associated with the stimulus plan.

Several sectors of the economy are now experiencing or are expecting increased demand. For example, Alcoa, Inc. is receiving increased interest in lightweight metals and is concerned that they will not be ready to fill orders due to low inventory levels.