Has the Recovery Begun?
There are so many economic indicators that it is very difficult for the average person to stay on top of exactly what is happening in the financial markets, and even more difficult to discern what is happening to the economy as a whole. The events of the last 12 months have sent shockwaves through the economies of all countries, and in recent weeks there have been many claims by experts in all financial centers that the worst is over, or that we have bottomed out. In my opinion it is way too early to make these claims and I would much prefer to approach the near term with caution, just as we have done for the last number of months.
Quoting from an editorial in the Wall Street Journal on July 24, 2009:
What makes the current recession so bad? Other downturns have been more painful by some measures, but none since World War II has delivered so many severe blows to the economy at the same time.
Therein lays the most significant reason to approach the coming weeks and months with caution. The Wall Street Journal editorial cites the fact that many if not all segments of the economy have been devastated simultaneously. This situation is obviously going to take more time to rectify, even if the business channel pundits prefer to sweep the facts under the carpet and attempt to cheerlead us back to prosperity.
Most brokerage houses, investment banks, and money management firms make their living through transaction fees and management fees. These fees only materialize if they actively trade the positions in the accounts of the clients. Therefore, it is easy to understand why many of these firms believe that the worst is over. As informed consumers and investors, it is incumbent upon us to do some homework on our own. We need to look for the facts and figures that give us confidence that the worst is over, and that will allow us to begin once again to actively manage our savings and investments.
In several previous articles I have discussed which of the many economic reports and data streams we should track on our own. By way of brief review, the very key elements are employment and housing data.
There has been some improvement in housing data, yet the improvement is being measured against absolutely horrendous previous month or previous year data. There has been no improvement in the employment picture, and as we have stated in this column in the past there is not likely to be a better employment picture for at least 6 to 9 more months. You can see by the chart below that the rate continues to climb and has eclipsed the highest unemployment rates for the last 10 years.
While history tells us that employment is the last area to improve after a major recession. I believe the significance of that fact to be even greater in our current economic slump. The reason I place so much importance on the employment data is that it is directly connected to the worst performing sector of the economy: housing. Even with some of the lowest interest rates in many years, there is no chance of securing a mortgage if you are not employed. Recent up ticks in the housing sector are largely do to foreclosure sales and bargain hunters in my opinion, and neither can sustain a prolonged up move in housing. Until the employment picture improves there can be no sustained improvement in housing in my opinion.
One more very important element which differentiates this current economic slump from previous downturns is the huge level of government spending. Both the deficit (the amount we spend in the current year OVER what we take in from taxes, fees, etc.) and the national debt (the total of all monies owed by the US Government, currently exceeding $11 trillion), are far in excess of any previous time in our history. The government spending will eventually result in greater taxes and possibly much higher levels of inflation, both of which will prolong the economic crisis.
The bright side of the current situation is that there are alternatives for securing our finances, including insured savings and CDs at BCU, government bonds, and even some individual stocks which can provide opportunities for retirement planning, education, and future purchases. Do your own investigation of the various investment alternatives, and particularly look at well placed well managed companies to begin building a stock portfolio for our eventual return to more predictable economic times. The most troublesome issue in todays market climate is finding the facts, and that can be done only through your own efforts as previously stated. Please feel free to send your comments and questions along to BCU, as I am happy to address specific issues on request.
© Patrick J. Catania 2009
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