Sometimes it’s hard to stay positive about the economy as
you watch investment markets jerk downwards, upwards, and generally dance with
volatility over a protracted period of time.
When almost every headline & television news show tells us that we
are headed to recession (based largely on a leadership vacuum in world
politics), I think it is important to also look at the economic underpinnings
beneath the noise as well.
A recent research report from Bank Credit Analyst Research –
one of the world’s leading providers of global investment research since 1949 –
listed a number of positive economic points that are worth noting when trying
to determine the direction of the economy:
Oil prices have fallen sharply over the
past four months. Oil is
down nearly 25% from its high in late April of $113.93. This will provide
relief to consumers and, combined with a bottoming in the market when we get
there, will be a nice boost to potential economic growth.
Real bond yields have fallen to
extraordinarily low levels.
Since many homeowners can therefore refinance to take advantage of better
interest rates, consumers may begin to cash-flow relief.
The Chinese economy
continues to grow, and policymakers there have a lot of ammunition to deal
with any slowing that may appear. Earlier this year, the fear was that the
Chinese economy was trending dangerously, as policymakers attempted to give
the people what they want in terms of economic growth to support China’s growing
middle class. Recent policy action in China suggests that policymakers
there are moving away from a “growth at all cost” mentality to a more
sustainable growth mentality.
Treasury yields are low, indicating
global confidence in the U.S. as a safe haven, despite the recent S&P “downgrade”. Now is a perfect
time to have the political debate on spending and taxes. The difficulty is
that, with the 2012 election cycle upon us, answers will probably not be coming
forward from our leaders in Washington.
We are on a low budget in the U.S.,
but that doesn’t mean that fiscal reform has to be a destroyer of our economy.
Sensible spending restraint and some tax adjustments can allow the U.S. economy
to expand at a healthy pace going forward.
Stock prices and interest rates are
currently so low that we do not need economic growth to justify the purchase of
equities. I do not think
that the stellar profits many companies reported for the second quarter is a
surprise to anyone by now. It is also encouraging to note that earnings per
share can still grow in a low economic growth environment. Firms will likely
use the earnings that they do not pay out as dividends to repurchase shares
since it is not likely that companies will continue to sit on ever-growing cash
balances if they are not investing for growth. It is likely this type of
earnings growth will add support to the markets.
The index of leading economic indicators (LEI) rose for a
third consecutive month in July.
Admittedly, an advance in August will be a bit more difficult to achieve given
the recent market volatility and negative sentiment. However, Fed accommodation
still allows for a steep yield curve despite some recent flattening, which
should provide some lift to August LEI. Unemployment claims holding in around
the 400,000 mark may support LEI, and that level is not indicative of a recession.
·
On Wednesday, August 24, durable goods
orders blew away expectations.
o
A
monthly surge in new orders for motor vehicles and parts – the best in eight
years – headlined a strong durable goods report for July. Another economic
measure that implies that the economy may not be what it appears--or at least may not be as bad as reported by the talking heads.
·
The Baltic Dry Index – the index measures the price of
transporting raw materials by sea and is often cited by economists as a
bellwether of global economic activity – most
recent release revealed that it is now up 21 percent from its recent lows.
Maybe those of us who think the global economy, while slowing, has not
fundamentally changed are not misfits after all. While the index certainly has
its critics, in an environment where investors are beginning to price in a
global recession, the increase in the Baltic Dry Index is one piece that calls
that view into question.
· Unemployment claims holding in around the
400,000 mark may support LEI, and that
level is not indicative of a recession.
While
there are certainly some fundamental issues that need to be addressed in the
economy (particularly the level of government debt in Developed countries), not
all news is bad news either.
