We still see the glass as half full, given likely decent global economic growth, healthy corporate p...
8 Reasons to Keep Faith
06/06/2011 11:06 am EST
The economy’s many enduring strengths will outlast the current slowdown in growth, writes MoneyShow.com Senior Editor Igor Greenwald.
Two years after the bust, this is progress of a sort—we have the luxury of feeling awful even when things are not, when they’re merely kind of blah.
This is how a disappointing monthly gain in US payrolls turns into a harbinger of the Great Recession Revisited.
The unemployment rate ticked up to 9.1% for May, up from 8.8% in March but down from 9.8% in November.
You remember November: that was the month the Fed’s bond purchases were going to wreck everything. So here we are in June, and it’s the end of QE2 that’s said to be the problem, sometimes by the same people who predicted calamity as soon as that ship set sail.
What else can we scare up as portents of the apocalypse? Well, there were a couple of sentiment surveys, filled out by consumers paying $4 a gallon for gas and purchasing managers reporting continued growth in manufacturing, albeit cooling from boom times to more of a touch-and-go situation in the biggest one-month drop in 27 years.
Some of the recent hand-wringing is plainly political, as opponents of the policies pursued by the Federal Reserve and the White House seize on the first decent chance in a while to claim that they were right all along.
It would be silly to minimize the risks. It’s not hard to script a scenario in which waning confidence, combined with an emerging-market slowdown and the European debt crisis, saps recent vigor from corporate profits.
The recent moderation in energy prices rests almost entirely on the frail shoulders of Saudi Arabia’s 86-year-old absolute monarch.
And then there is the debt ceiling farce, in which a government that can’t afford to spend and can’t afford not to spend will—after a good fight with itself—pledge fiscal rectitude down the road.
Also, China is looking very bubbly. Commodities too. And stocks as well as bonds might be similarly overpriced, based on the likelihood that all booms eventually bust.
This seems like a fair summary of recent financial reporting. Everyone’s a skeptic now, because optimism has been outsourced.
Well, almost everyone. Here are a few reasons to keep the faith:
1. Jobs Are Coming Back
So far this year, we’ve gained an average of 156,000 payroll jobs a month, double the average monthly gain in 2010. That hasn’t brought back most of the 8.8 million jobs lost during the streak of 25 straight monthly declines from 2008 to 2010, but it’s a start and suggests some pent-up labor demand.
Average weekly hours worked, a leading indicator, remained at April’s multi-year high. Aggregate hours worked increased for the 12th time in 13 months.
2. Consumers Keep Spending
Major retail chains saw a 4.9% sales gain last month, and while that was slightly below forecasts, it was hardly a disaster either, considering the 40% year-over-year spike in the price of gas. Demand for gasoline has been running 1% to 2% below last year’s, suggesting motorists are doing more complaining than conserving, for now.
As you’ll recall, US consumer spending was supposed to have collapsed by now under the crushing burden of debt repayment. Instead, the unemployed are emptying their retirement accounts and everyone else is pretty much spending paychecks as usual again. There’s even a (faint) whiff of wage gains in the air.
NEXT: 3. Corporations Are Flush|pagebreak|
3. Corporations Are Flush
The economic decision makers who matter most are sitting on piles of cash (a collective $1 trillion for the S&P 500) earning a relative pittance, backed by a bond market willing to lend a fortune for a few extra basis points of interest.
S&P 500 profits are growing 16% and revenue 9%. There’s a lot of pressure to capitalize while the sun shines, and plenty of confidence that the business cycle is nowhere near a sunset.
4. Emerging Markets Keep Growing
China’s most recent annual growth rate was 9.7%, India’s 7.8%, Brazil’s 4.2%, and Indonesia’s 6.5%. All of these countries are experiencing rapid income gains of the sort that tend to support strong public finances, and China’s rulers will do almost anything to forestall a major bust that might eject them from power.
Growing prosperity does not preclude the odd bear market, but it does presume more booms then busts on the whole. On the corporate level at least, emerging markets remain the destination of choice for money cheaply borrowed at home, to the advantage of their workers and economies.
And they will buy more US grain, copper and machinery as a result. US exports were valued at $172 billion in March, up from $126 billion two years earlier.
5. Credit Markets Are Easy and Lending Is Improving
Bond issuance has been running at a fever pitch, as corporations race to lock in modest current rates and spreads to Treasuries for the long haul.
Yields on junk bonds and investment-grade debt have been flirting with record lows until very recently. Walmart (WMT) is paying 0.75% on its three-year debt to afford its newly announced $15 billion share buyback. People are buying 100-year notes from Mexico and Norfolk Southern (NSC).
There will be no rerun of the 2008 corporate funding crisis. According to the Federal Reserve, bank lending standards are easing and business loan demand gradually recovering.
6. Housing Is Not a Black Hole
The main thing holding back the real-estate market is the lousy state of the real-estate market, with so many potential buyers under water on their current mortgages, unemployed, or otherwise unable to qualify for a mortgage.
But there are plenty of signs that demand will recover, starting with rising apartment rents and the accelerating formation of new households. Construction is at long-time lows. And outside of the distressed and foreclosed properties, prices are stabilizing.
7. State Tax Revenue Is Recovering
Lost in all the angst about budget cuts and scare talk about muni-market defaults is news that state tax collections are expected to rise almost 6% in fiscal 2011 and another 2% in fiscal 2012, reclaiming levels seen five years ago. All but six states are seeing 2011 revenue meet or exceed budget projections.
8. This Is Not 2008
Let’s assume the dreaded double-dip is upon us. How deep would it have to be to wring out all of the recent excesses?
The correct answer, of course, is, what excesses? There is no massive inventory overhang to be liquidated, no millions of jobs to cut to rein in costs. Been there, done that. There is, however, plenty of pent-up demand after years of unwelcome austerity.
I know there’s a crowd out there that believes we won’t have paid for our perceived sins until the economy has been laid to waste and everyone is carting dollars around in a wheelbarrow. That gang should keep getting proven wrong. There are lots of reasons to believe tomorrow will be more prosperous than yesterday.
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