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Portfolio strategy update End of recession perception David Gottstein
Editor’s note: The following column was compiled in early in early March. David Gottstein is with Dynamic Research Group in Anchorage. There is a growing consensus that the recession is over. Some are even saying there actually never really was one in the first place because gross domestic product may be higher than it was a year ago.
There has been a definite increase in manufacturing production. Incomes have risen somewhat. Housing is strong. Retail sales have been holding up. There are indications that the semiconductor industry is beginning to move forward again.
And inflation remains tame, so the Federal Reserve will have no reason to raise interest rates as of yet.
There are even signs that the European economy may have bottomed. And there is evidence that the advertising market is just beginning to improve. Will it continue? All this has led to a growing belief that the economy will start growing again. That led to dramatic movement in the stock market last week.
Will it continue?
Maybe — for a while.
Just the fact that economists and market practitioners are feeling better about the economy will add some fuel to the market. Whether it is real and sustainable will depend however on fact, not just perception.
There are a few notes of caution to suggest that just maybe we would be premature in announcing a sustainable bullish economy and stock market from here.
For one, inventory levels have been historically low recently. A good bit of the production increases may very well have come just from re-balancing inventories after their depletion. When supplies meet demand, we may not see continued increases in production.
Secondly, for sure employment levels are still falling, and increases in production that have been identified have largely come from productivity increases, not job growth.
And it isn’t clear that the lion’s share of whatever production increases that do take place will add jobs domestically. A lot of capacity has been moved to China. Next time you are at a Wal-Mart, check where their discount merchandise is coming from. Until hiring takes hold, don’t expect a leg up in consumer demand. Expect spending to be tight Additionally, even though the purchasing managers index is up, CEO’s are still very cautious about the near term. They are saying they don’t see the turnaround yet. Until they do, expect capital spending to be constrained. Especially with capacity utilization rates still so low.
Finally, Japan is still in the toilet, and China is in trouble.
The reason China didn’t raise a big stink as a result of their newly purchased official Boeing 747 being bugged is because they don’t want to rock their relations with the United States. They are desperately in need of our capital in order to maintain any growth. Their banking system is a mess, and can’t otherwise provide the liquidity they need — liquidity that will build factories that rob Americans of future jobs.
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