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The Economy Recovery: What's Next?
by   Mark Wade  

THE RECESSION IS OVER: NOW WHAT?

The good news came through toward the end of last year: After America’s gross domestic product had shrunk for four consecutive quarters (and five out of six), it rebounded in the third quarter of 2009, growing at an annualized rate of 2.8 percent. If that wasn’t quite strong enough to calm fears of a double-dip recession, we got even better news more recently: GDP growth exploded at an annual rate of 5.7 percent in the fourth quarter of 2009.

Concerns that the economy would contract again have largely evaporated. The Obama administration has now forecast GDP growth to be 3.0 percent throughout 2010. But even with that sort of solid footing under the economy as a whole, many investors are still wondering when we will see a healthy fiscal outlook and a stock market that can get out of first gear. Here is a thumbnail look at where we’ve been, and where we might be headed:

Stock Markets In early February, the Dow Jones Industrial Average crossed the 10,000 mark for the fiftieth time since it first surmounted that milestone in 1999, and we still don’t seem to be able to pull much past that 10,000 mark. Despite a furious rally in 2009, the Dow is still down sharply from the market’s October 2007 peak, when it closed over 14000. After bottoming out at just under 6600 in March 2009, it has been hovering around 10,000 since last fall.

The other major indexes tell a similar story. The S&P 500 and the Nasdaq both saw tremendous gains in 2009, but neither has made it back to its 2007 peak.

Inflation The federal stimulus bill has created huge deficits, fueling fears of inflation, which is thought to follow high levels of government debt. It’s starting to creep up, although the number is still at relatively low levels. The January inflation rate, on an annualized basis, was 2.63 percent. That’s not alarming in and of itself, but given that the rate had been 1.84 percent in November and had actually been negative (minus 0.18 percent) in October, the trajectory is a bit worrying.

As measured by the spread on TIPS (Treasury Inflation-Protected Securities), the expected 10-year U.S. inflation rate is a mere 2.25 percent. That might be the best indicator of where the smart money thinks inflation is headed.

Unemployment Joblessness remains the economy’s biggest problem. After peaking in October, at 10.2 percent, it has settled back at 9.7 percent. The Obama administration has warned that the number is likely to average 10 percent throughout this year, meaning that the picture is going to get worse – again – before it gets better. Christina Romer, who heads up Obama’s Council of Economic Advisors, has forecast that the economy will produce 95,000 jobs per month for the remainder of the year, which won’t be enough to reduce the unemployment rate.

Housing Along with unemployment, housing has always figured to be the laggard in the recovery, but the market seems, finally, to be gaining some steam. Nationwide, home prices increased in both the second and third quarters of 2009 (the most recent figures we have), according to Freddie Mac’s Conventional Home Price Index. In the middle Atlantic region, which includes New Jersey (as well as New York and Pennsylvania), prices were up 1.1 percent in the third quarter of ’09, the highest of any region except the Pacific.

Housing starts were up 21 percent nationally in December, the most recent month with available data. But they are still lower than at any time prior to the bursting of the bubble in 2006, dating back to when such records started to be kept, in 1967. Nearly one in four homeowners is underwater on their mortgage, and homeowners have lost nearly $6 trillion in home value since the market’s peak in 2006.

Global Situation Despite talk about our real estate bubble and the meltdown in the banking sector fueling our problems, the European Union’s recession was steeper than ours, and Japan had consecutive quarters where its GDP dropped by 13.1 percent and 11.7 percent on an annualized basis. Russia’s stock market had lost 70 percent off its peak by October 2008. Because other countries suffered even more than we did, the U.S. is well positioned to take its place as the dominant economic player when we reach full recovery.

Credit Squeeze A big part of the financial slowdown was caused by the fact that banks had turned gun-shy, and have become much more prudent about giving out loans. Bank loans backed by the Small Business Administration have dropped by 36 percent from their 2008 level.

Less visible was the fact that bond issues dropped off dramatically, choking off funds to business and governments that could have been used to expand the economy. After a record high of $338 billion in municipal bond issues in 2007, the number of new issues slowed to a trickle in early 2008. But the 2009 figure set a new record at more than $350 billion, helped along by the stimulus bill.

At this point, with the Federal Reserve’s interest rates near zero, it doesn’t look as if credit concerns are a big problem any longer. A recent survey of small businesses found that only 5 percent of small business owners cited financing as their top business problem. The biggest problem, cited by 31 percent of those surveyed, was poor sales.

A LONG WAY TO GO All in all, we’re making progress, but the markets are still sluggish, unemployment figures to be a persistent problem, and we face massive government debt from the stimulus program. It promises to be a long journey back to economic health. The people who survive it will be those who carefully plotted each step and were prepared both for setbacks and for whatever good news may lie ahead.

It’s been said many times that the recession we’re now emerging from was America’s worst since the Great Depression. While the severity of it surprised many of us, veteran wealth managers, with their eyes on long-term goals, are always prepared for bumps in the road. Echelon Wealth Strategies is here to help you weather the bad times, and prosper in the good times. If you’d like to talk about what your financial future might hold, feel free to give me a call at 908-647-6000.

 



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