A halting recovery, but recovery nonetheless

Last week the U.S. government released numbers showing the economy grew at an annualized rate of 2.4% in the quarter ending June 30, 2010.  Compare this to a growth rate of 3.7% in the first three months of 2010 and 5% in the last quarter of 2009.

One can see a slowing of growth as businesses have achieved their desired level of inventory after allowing stocks of goods to decline significantly during the uncertainty of the credit crisis in fall of 2008 and first one-half of 2009.  Unemployment continues at high levels and weighs on consumer confidence.  Deleveraging by governments and individuals also is expected to hold the consumer back for some time.

Still,  the economic recovery continues in the U.S.  Stock investors seem to have become at least less pessimistic about the recovery and pushed stock prices up about 7% in July.  Things can always change, but those who were exiting stocks in May and June amid worries of a double dip back into recession seem to have missed the recovery story and the stock gains that accompany recovery. 

April employment information for U.S. is positive surprise

The Labor Department announced today that April saw 290,000 jobs added to U.S. payrolls (as compared to expectations of 180,000).  Additionally, March job creation was revised up to 230,000 from the originally announced 162,000.  For the last 4 months, job create has averaged about 140,000 per month.

It is important to consider that the U.S. continues to experience an economic recovery that is stronger than most economists and market observers were expecting.  This is just one piece of data that investors must digest, as concerns over a possible debt default by Greece (the costs of a Greece bailout are similarly concerning) spread over Europe and the world.

We simply remind investors not to lose sight of the hard economic data (like job creation) in the midst of all of the attention given to items like dramatic market swings and chaos in Greece.

U.S. 4th Quarter 2009 GDP Growth Surprises at 5.7%

The Commerce Department announced their "advance" GDP growth rate for 4th quarter at 5.7% this morning.  Expectations had been around a consensus number of 4.5%, so this was a positive surprise.  Much of the strength came from cyclical recovery in inventories (i.e. companies quit letting inventory levels just decline and instead increased production to replenish inventories).

While GDP 4th quarter strength is a plus, it comes against the backdrop of significant structural challenges in the U.S. and worldwide economies.   Examples of these challenges are timing and methods of removal of low interest rates and other stimulus by the Fed, possible long-term increased savings (and resultant consumption reduction) by U.S. consumer, and effect of eventually addressing U.S. and other developed countries budget deficit.

We'd conclude these comments with applause for today's GDP announcement accompanied by recognition that the private sector will need significant strength and resilience as we address a variety of sizeable challenges.

Recovery.gov

On February 17, 2009 President Obama signed into law the American Recovery and Reinvestment Act of 2009.  The stated goal of this legislation was to stimulate our economy via spending, benefits and tax cuts.  The total dollar value of the bill was $787 billion.

Here we are almost precisely 11 months later.  If  you visit the website set up for tracking this bill at http://www.recovery.gov/ you will see that as of January 8, 2010 about $260 billion (33%) of the total has been paid out (must add 3 numbers under "overview of funding" to arrive at this).

We have a few observations:  (1) Our $14 trillion economy has yet to recognize the growth associated with remaining $527 billion which is equal to over 3 1/2% of our total economy so economic growth will be supported by this in 2010 (especially the first half), (2) the private sector will need that much more recovery to continue to grow after this stimulus is fully spent, and (3) the U.S. borrowed all of the money for this stimulus and will have to repay this someday.

U.S. unemployment now over 10% for first time in 26 years

In October U.S. unemployment rose over 10% (to 10.2%) for the first time in 26 years, and only the 2nd time since the 1948 employment record keeping began.  Behind this headline number we examine additional concerning details:

• the rate of unemployment rises to 17.5% when including those who have stopped looking or are working part-time since they can't find full time work
• although unemployment in management and professional occupations is only 5%, the rate in production is about 15% and the rate in construction is about 20%

Although the 3rd quarter U.S. GDP was recently announced at a preliminary estimate of growing at an annual rate of 3.5%, the jobs report shows this growth has yet to reach Main Street America.  Further, some now estimate additional increases in unemployment such as Moody's Economy.com who sees the rate peaking at 11% in mid-2010.

In the meantime, Congress and the White House have been focused solely on healthcare legislation.  Expect this to change in the near future as voters this week sent a signal of dissatisfaction with election of Republican governors in New Jersey and Virginia.  Although the White House claims to have saved or created 640,000 jobs with fiscal stimulus, the math by observers reveals the cost-to-date of each such job to be $92,000.  A jobs credit bill is now being discussed, but the already record-high U.S. budget deficits make any such action challenging for lawmakers.

The big question for the economy and investment markets seems "Will U.S. consumers continue to spend as concerns about unemployment grow amid a diminishing ability of government to do anything about it?"  We shall see.

What does recovery mean?

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.