Things Are Definitely Looking Up

09/23/2009 11:16 am EST


David Fried

Editor, The Buyback Letter

David Fried, editor of The Buyback Letter, says the economy continues to show signs of life, and that’s good news for the market.

Recent positive news gives us hope.

Businesses are doing more with less: Nonfarm payrolls fell by 247,000 in July and 217,000 in August, the fewest since last August, indicating further moderation in the trend of job losses. These figures were way down from the 700,000 in monthly job losses we were experiencing at the beginning of the year.

Also, nonfarm productivity surged at a 6.4% annual rate in the second quarter, the biggest increase since the third quarter of 2003 and larger than the 5.5% expected increase. Manufacturing productivity rose at a 5.3% rate, the biggest [jump] in four years.

Existing home sales rose 3.8% in the second quarter as lower home prices and government tax breaks pushed many would-be home buyers off the fence and into the real-estate market.

As sales increased, so did home prices. The pace of single-family home construction edged up almost 2% and building permits for future construction climbed nearly 6%. Additionally, July existing home sales were up 7.2%, the fourth month in a row of rising sales.

As we have said before, housing has led the rebound from every recession in this country since 1960. Historically, existing home sales pick up first, followed by new home sales and then new home starts. This appears to be the case this time around as well.

Even as the recession is receding, there is worry that the recovery may be weak because consumers are reluctant to spend. This is [called] the “paradox of thrift”: What is good for the individual (saving) is bad for society (low consumption). Since consumer spending has accounted for 70% of the nation’s economic activity recently, even a small decline in spending could significantly depress demand for goods and services.

In a poll by Bloomberg News, economists lifted their estimates for the third quarter [gross domestic product growth] by 1.2% compared with July, which would be the biggest boost in surveys since May 2003. These projections followed better than expected reports in manufacturing, employment, and home construction.

With the aforementioned slowing in the pace of job losses, Americans may feel more secure in their jobs and therefore find a happy medium between the free-spending days before the “great recession” and the tight-fisted ways of today. My guess is this is what will happen if the economy continues to right itself and job losses continue to moderate.

All in all, the economy is in a much better place than it was at this time last year. It is not out of the woods yet, but things are going in the right direction.

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