U.S. economy at mid-year: signs are positive, but hurdles remain
A litany of numbers, including existing / new home sales, durable goods orders, factory orders, consumer confidence, and consumer spending all display signs of a recession that's forming a bottom. Hence, Americans can head into their 4th of July holiday next weekend reasonably confident that the worst is over – concerning most metrics – regarding the U.S. recession.
Top task: job growth
Or maybe they can't. The U.S. unemployment rate climbed to 9.4 percent in May with more than 5.7 million jobs lost since the recession started in December 2007. Further, because unemployment is a 'lag indicator' – it typically continues to rise for several quarters even after the economic recovery starts – economists say the nation will be fortunate if the unemployment rate peaks at about 10 percent and heads lower from there.
In other words, the economy will likely show signs of improvement in many areas before one of the two 'big enchiladas' – job creation – starts to make its presence felt on corporate revenue and earnings.
And about those corporate earnings, they're the other 'big enchilada': if we're lucky, we'll begin to see year-over-year quarterly increases in earnings per share in the fourth quarter of this year or the first quarter of 2010.
A tailwind (or two) would help
What could provide the U.S. economy with another, nice tailwind? A decline in oil prices. Oil, which has basically doubled in price in six months, acts as a tax on U.S. consumers and also increases business costs. Most energy market veterans say oil's current supply/demand fundamentals necessitate just a $45-$55 per barrel price for crude. Nevertheless, oil stubbornly hangs near $70, despite high inventories and low demand in the U.S. and abroad.
The reason? Institutional investors, who have bought oil as an alternative asset, and as an inflation hedge, in the event of a weakening dollar. Even so, most economists point to a softening oil price in the second half of the year, as fundamentals finally carry the day; but don't hold your breath waiting for it. The bottom line for investors regarding the world's most important commodity: if it oil trends lower, it will boost U.S. economic growth; if it doesn't, the recovery will be weaker.
A second, significant, and some say mandatory tailwind must come from China, India, Brazil/Latin America and Russia/Eastern Europe. U.S. consumers, tapped-out from a decade of stagnant incomes and over-consumption, aren't capable of driving global GDP growth. The era of the 'frugal consumer' has begun in the U.S. and it looks like it's going to be a long-term trend. Belt-tightening, paying down debt, cost controlling, and saving are in; needless consumption and optional corporate expenses are out.
Hence, now is the time for all good emerging market consumers to come to the aid of the global economy, including the U.S. economy. That's no joke. Simply, consumers in China, India, Brazil, and Russia and other emerging market countries must increase their spending to make up for reduced U.S. consumption or global growth will not return to normal levels of 4-percent-plus global GDP growth.
Regarding the financial crisis, U.S. Rep. Barney Frank, D-Massachusetts and chairman of the House Financial Services Committee, is fond of saying, "No one ever gives Congress credit for avoiding something." Frank is correct. He and other Congressional members will frequently go home, but no will ever say, 'Hey, my bank ATM still dispensed cash,' or 'My business's expense transactions were processed, as scheduled.' No one will ever back-pat Congress for helping to avert a collapse of the financial system.
But that doesn't mean its actions, combined with those by the U.S. Federal Reserve, and other major central banks, didn't prevent a catastrophe: they did. No political gains are likely to flow from those actions, but investors should know that they represent a key victory in the struggle to stabilize the financial system, and normalize credit markets, both in the U.S. and abroad.
That said, financial stabilization is not tantamount to job growth and corporate earnings growth, and those remain the hurdles for the U.S. economy heading into the second half of 2009. Congress, through fiscal stimulus, and the Fed, through quantitative easing, have done a lot to pump-prime the U.S. economy. Now it's up to the American economy's remarkable ability to adapt, innovate, and renew itself – to create new sectors of growth in health care services, information technology, infrastructure, education, renewable energy, biotechnology, and high-end/technology-intensive manufacturing, among others - to create the millions of new jobs needed and to propel corporate earnings to even higher levels of success.
To be sure, the current restructuring represents a major task for Americans, businesses, and for policy makers, but the nation has overcome bigger economic hurdles in the past, and there's every reason to believe the nation will do so this time as well as 2009 progresses.
Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.