Struggling Economy Stuck in Neutral

“The May-Investments Leading Economic Indicator was flat in September.  Continued contraction by lending institutions and weakening new order activity in the business sector offset increased drilling activity. The economy remains on the brink, with economic growth too slow to reduce the unemployment problem but not slow enough for economists to conclude that the economy has fallen back into a new recession.

“The monthly indicator increased from 1184 to 1187, which is less than a rounding error.  By next month, revisions to the data points, alone, could reverse that growth. Retail sales, money supply growth, small business confidence, corporate profits, and capacity utilization have all flat-lined.

Retail sales strength remains key. Sales growth started in June of 2009, but in September retail sales started falling again, albeit only modestly. Global export activity may also be slowing.  During the financial panic, sales slacked off but production came to a halt, so inventories were drawn down.  Since then, rebuilding inventories has helped turn things around. To much inventory restocking can force companies to cut back production. We need confidence and retail sales to start growing, or this recovery will be very short-lived.

The modest economic growth the country has enjoyed has been a consequence of low interest rates, lower housing costs, a more competitive manufacturing sector and continued innovation in the technology sector. Fortunately, those factors are still in place. Investors would be wrong to let today’s political pessimism lead them to conclude that the current recovery will necessarily be short-lived, or that continued growth is out of the question. 
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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