Some Christmas Cheer - Believe it or not, the economy is in a recovery

by Robert B. Garey, Ph.D.

Here’s some great news that you may not be hearing on TV: The U.S. economy is no longer on life support. It’s growing. Growth definitely sagged over the summer, but it’s picking up now. Here are a few signs:

• New jobless claims are trending downward. Initial claims for unemployment insurance, reported weekly, are at less than two-thirds of the peak two years ago.¹


• The private sector has been adding jobs every month this year. We need to add a lot more, of course. Despite fewer than expected being added in November, we are headed in the right direction.²


• Corporate profits are at or near a record high, and rising. Profits of nonfinancial companies are the highest since the end of 2006. As economist Ed Yardeni says, “Repeat after me: Profitable companies hire workers”.³


• The manufacturing sector is strengthening. The November Purchasing Managers Index of manufacturing showed strong growth – including strength in manufacturing employment, new orders, and exports. Economist Scott Grannis says this suggests the economy may be growing at a 4% rate in the 4th quarter, compared with 2.5% growth in the 3rd quarter and 1.7% in the 2nd quarter.⁴


• Consumer spending is also up. Economist Brian Wesbury says that consumer spending surged in October and has been very strong after Thanksgiving—especially in online purchases. He says consumers are spending more because they’re earning more—private sector incomes are up 4% and small business incomes are up 5.8% in the past year.⁵

This is good news. It means the economy is repairing itself. Of course, we still have a lot of problems that need fixing. Unemployment is too high, as so is government spending and the debt that it’s caused. The stock market is still well below its peak in 2007, and so are most baby boomers’ retirement assets. But America is on the mend. As Scott Grannis put it,

“The ‘forces of recovery’ have been slowly building for the last 18 months, and in my opinion, will not be easily derailed. Left to its own devices, the U.S. economy has a strong propensity to grow, and has been growing despite the fierce headwinds of fiscal and monetary policy.”⁶

What does this mean for you, as an investor? With company profits high and growing, and stocks at low valuations based on next year’s expected earnings⁷, there’s a lot of room for stocks to rise over the next year or two. And yet—many people are still too heavy in cash and bonds. The memory of the 2008 market crash is still fresh, and much of what they’ve been hearing on the news has been doom and gloom. Unfortunately many of them won’t start investing in stocks again until the Dow Jones Average is much higher. By then the potential for gains may be much less than it is now.

Are you underinvested in stocks for your investment goals? Tampa Asset Management can help you figure it out.

Contact us for a free consultation.
_________________________
¹Doug Short, Weekly Unemployment Claims: Lowest Since July 2008 , Seeking Alpha, 11-24-10
²WashingtonMonthly.com, “Private-Sector Job Growth,” 11-5-10.
³Ed Yardeni, quoted in Hays Advisory’s “Market Comment”, 11-29-10
⁴Scott Grannis blog, Manufacturing Sector Continues to Improve , 12-1-10; Institute of Supply Management, “November 2010 Manufacturing ISM Report on Business, 12-1-10.
⁵Brian S. Wesbury and Robert Stein, It's a Self-Sustaining Recovery, Forbes.com, 11-29-10.
⁶Grannis, op cit.
⁷Robert Huebscher, interview, Jeremy Siegel on the Upside for Equities and the Virtues of QE2 , Advisor Perspectives, 11-16-10.