November 2009
The economic news we are currently seeing presents an economy showing signs of recovery. Gross Domestic Product (GDP) is up. Consumer and corporate spending have increased. Combining this spending with increased government spending—due largely to stimulus plan spending—has been felt within the economy as a whole and 3rd quarter earnings figures are coming in better than expected for most companies. We are even starting to see a few news releases of companies recalling laid-off workers in order to increase production. Although many families are still dealing with unemployment issues or lower retirement account balances, the economy is showing signs of improvement.
GDP
Gross Domestic Product (GDP) is a broad measure of the state of the economy, measuring production, public and private spending, imports and exports. Third quarter advance estimate GDP figures have come in higher than expected with a seasonally adjusted annual rate of +3.5%.1 This rise in GDP is the first increase in GDP since the 2nd quarter of 2008. In addition, the average quarterly GDP figure for the past ten years is +1.9%.2 As with any statistical measure, GDP has its limitations and should be viewed in the context of other economic indicators. However, the positive GDP change seen this previous quarter is significant and should be noted. I would note that this figure is an advance estimate. As usual, we will see some revisions to this data point in coming weeks. The key point that GDP was positive for the quarter will not change though.
Spending
Companies have started to spend some of their cash reserves. Business spending rose by 11.5% in this quarter. Government spending grew by 7.9% (after a 11.4% increase in the 2nd quarter).3 This combination of increased consumer, corporate, and government spending is helping fuel business recovery. It should be noted that the majority of stimulus funds are slated to enter the economy within the next year or so. The increase in government spending we saw in the 3rd quarter is actually tied more to defense spending rather than to stimulus funds.4
Corporate Earnings
Approximately 80% of companies who have released 3rd quarter results have beat their 3rd quarter estimates.5 Corporations are turning a profit. Ford, JPMorgan, Yahoo, Caterpillar, Loews, Aetna, and numerous other names you may not be as familiar with are making headlines with 3rd quarter profit figures above estimates. About 70% of S&P 500 companies have released third quarter figures and most have beat expectations.5 Earnings are still down from the same period last year, but are coming in above prior guidance.
Unemployment
While statistics like GDP and consumer spending are more abstract representations of the state of the economy, figures like the unemployment rate are more tangible to most people. While the unemployment rate does remain historically high, Labor Department seasonally adjusted figures are showing slightly lower numbers of both initial and continuing claims.6 This is not just a one week abnormality, but a continuing, slow downward trend. And the fact remains that unemployment is a lagging indicator—showing where the economy has been, but not where it is headed. The general consensus amongst economists is that historically high unemployment will remain for about another year or so. An unemployment rate of 10% does mean that the vast majority of people within the labor force are working.
World View
In the Fall of 2008 the whole world entered a slowdown. The recovery will be better in some regions of the world than others. The MSCI World Index gained 17.4% during the third quarter.7 In comparison, the S&P 500 returned 15.0% and the Dow Jones Industrial Average (DJIA) 15.8% over this same time frame. A number of Pacific Rim governments and the corporations based within these countries kept a more cautious attitude towards debt during the past several years than what was seen from many U.S-based companies. Consequently, these companies and governments have more attractive balance sheets making investment in their stocks and bonds an attractive option for small positions within portfolios.
Overview
A year or so ago you could find some economists willing to speculate on the possibility of a recession turning into a depression and the ramifications of such a scenario. Today no credible economist is making such a forecast. Unemployment remains high, consumers are not spending as freely as they were a few years ago, and investors still display a degree of nervousness as one day swings of 1-2% in the DJIA are still common enough occurrences. Despite all of this we are seeing clear signs of recovery. The signs are building conservative, but definite trends of growth. Slow growth does not make for the same type of headlines as possible impending catastrophe. Wading through data showing incremental changes requires more work than speculation on sudden changes. Slow change is real, and is what we have right now. The economy is improving. It will take time to recover and for those—both private individuals and companies—who have been negatively affected by this recession to build back to a state similar to where they were before the recession, but we are now in an environment that will allow for rebuilding.
1) http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
3) http://online.barrons.com/article/SB125684374196016703.html
4) http://online.wsj.com/article/SB20001424052748703932904574509341078005538.html#mod=todays_us_opinion
5) http://www.bloomberg.com/apps/news?pid=20601087&sid=aMoZOc.LWBR4&pos=2
6) http://www.dol.gov/opa/media/press/eta/ui/current.htm
7) Fisher Investments, Third Quarter 2009 Review, page 1
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