More and More Indicators Turn Positive
The economy has turned the corner, and the early stage of the economic recovery will be stronger than many are currently anticipating.
Investing Specialists
I strongly believe that the worst of this miserable economic recession is behind us. Good riddance!
When all is said and done the economy will have lost almost 5% of its jobs, more than any post war recession. The recession so far has extended to 18 months, also a post war record. Fortunately, I now believe that the economy has turned the corner, and the early stage of the economic recovery will be stronger than many are currently anticipating. Early economic indicators have supported this view for some time, while some earnings reports and conference calls for the second quarter are finally beginning to support this view as well. Over the intermediate term, inventory restocking and a return to more normal production levels in both autos and housing will drive economic improvement.
Some of the early economic indicators that we track (ISM purchasing managers' survey and real wages) turned positive in November and December of 2008, and a much broader base of indicators turned positive (or at least less negative) very late this spring.
Earnings Indicators
However, there were no signs of any improvement in the March-quarter earnings releases--none.
As recently as June, I asked a broad swath of our 90-plus analyst staff how many of their companies were publicly admitting to any kind of improvement. Only two hands went up, and only after some prompting.
So I was pleased to see so many positive earnings surprises over the past two weeks of June-quarter earnings announcements. I will be the first to admit that many of these surprises came from margin improvements (many a result of employment cuts) and more slowly declining revenues due to inventory restocking. A broad range of companies from technology stalwart Intel (INTC), to manufacturers such as 3M (MMM) and Caterpillar (CAT), to discount retailers such TJX (TJX) and Family Dollar , and even to Goldman Sachs (GS) in the financials group all surprised to the upside.
Productivity and Jobs
The question I now get every day is that if companies continue to improve their productivity, how can we end up with more jobs and an improving economy? This is how I see it playing out: First, higher productivity means either lower prices for consumers or better profit margins for companies, either of which creates additional overall demand for the economy.
Secondly, there are two parts of the economy, homebuilding and autos, that are both running considerably below long-term natural replacement rates. The homebuilding industry by itself is running 75% below its peak levels and 66% below natural demand. The economy has lost more than 1.5 million construction jobs from its peak (versus 6 million jobs for the whole economy). That is before considering the jobs lost in the lumber and appliance industries and every other industry that supplies products or services for housing construction.
Overall, even if the housing industry only gets partially back to its previous high, there is a very real possibility that the construction industry could add back over a million direct jobs to the economy and many more indirect jobs. The tail wind from an improving residential housing market will be greater this time around compared to most other recessions.
Economic Report Wrap
In the news this week, existing home sales were up 3.6% sequentially for June, slightly better than expectations, while inventories held steady at 3.8 million units, in a month when inventories usually show an increase. Existing home sales are now up three months in a row, boding well for the housing industry and the broader economy.
Existing unemployment claims for the week came in below the magical 600,000 level for the third week in a row, though up modestly from the prior week at 554,000. This remains well below the peak level of 674,000 reached in late March. Next week, a smaller seasonal adjustment factor will put more upward pressure on this number yet again. Forewarned is forearmed.
The Michigan Consumer Sentiment Survey was flat with the prior month and ahead of Street expectation at 66. This is still below its high of around 70 just a couple of months ago but well off its lows of this winter. Frankly, I wish the number were a little higher because part of the reason this recession has been so severe is that consumers have spent a considerably smaller part of their income out of either fear or necessity during this recession. Hopefully, a better stock market and fewer layoffs combined with some better weather will lift this statistic and consumer spending in the months ahead.
Next week our housing analyst, Eric Landry, believes that the Case-Shiller Home Price Index could potentially surprise markets with its first sequential price increase in 31 months (though the number will still be down year over year). I believe the report could begin to turn the sentiment of potential homebuyers who have been slow to purchase because of fear that housing prices would erode even further. A combination of high affordability, stabilizing prices, low rates, and a soon-to-expire first-time homeowners tax credit could begin to clear some of the excess inventory off of the market.
Friday, will bring a preliminary read on the June-quarter GDP. General expectations are in a broad range of 0 to -3%, an unusually big range given that many of the inputs are known from previously released monthly data. However, construction, inventory, and exports have been swinging widely lately, so the numbers will be a bit hard to both predict and interpret. The release will include a major benchmark revision that will add a further twist to interpreting the numbers. My original guess was toward the lower end of the range for this quarter but considerably above consensus for the next two quarters. However, a sharply improved export report for May makes me believe that I am a bit too conservative in my assessment of the June quarter.
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