The U.S. economy contracted at an annual rate of 1% in the 2nd quarter which is a significant improvement over the decline of 6.4% (annualized) in the first quarter. This is a significant improvement and has been accompanied by over a 50% increase in stock prices as measured by the S&P 500 from the March lows. Some portion of the improvement in stock prices and in the economy must be attributed to actions by the Federal Reserve and the Treasury. The government supports are not sustainable in the long-term, and to some extent must be removed at some point in the future.
So what kind of recovery will we see, particularly as some government stimulus is removed? Stock price increases would seem to indicated the market believes we will see a strong period of growth as inventories rebuild and consumer demand increases. We are somewhat skeptical of this, and would instead worry that 2010 could see an economy with high unemployment and slow growth (possibly even periods of declines). We quote the analysts at PIMCO who said on August 20, "Government intervention on an unprecedented scale... has brought about stabilization. But this does not provide the foundation for a V-shaped return to business-as-usual. The violent rise in unemployment, above 9% in U.S. and Eurozone, is a significant challenge to income growth, and in turn, consumption growth and top line growth for business."
We may have a long way to go before we reach what truly feels like recovery. This seems to be time for caution by investors.