Retail sales and the Institute for Supply Management “New Orders” index provided the greatest encouragement. Retail sales have more than recovered from previous peak levels, and are setting new highs. As consumer sentiment improves, spending on both basics and big ticket items is recovering. After a couple years of pent-up demand, auto sales are recovering and there is room for even more impressive growth going forward. Spending on new homes and appliances, however, remains weak, as we have anticipated.
Shipping prices are another very weak sign. While they may be more indicative of an oversupply of shipping capacity than weak exports, the indicator suggests that exports are an area of concern. Given the weakness we’ve seen in most foreign stock markets, relative to the U.S. market, it raises the possibility that tensions in Egypt and restrictive banking policies in China may combine to slow down the rate of growth in emerging market economies.
Overall, the economy still seems to be growing. May-Investments forecast for 3.5% real growth in the Gross Domestic Product suggest that growth in 2011 might be just about right – neither too fast or too slow. Recent statistics show employee layoffs are running at very low levels, which helps build consumer confidence for all but the unemployed.
However, capacity utilization rates in the manufacturing sector, at just over 73 percent, are still low enough to suggest that companies will be slow to expand production or start hiring. A 73 percent rate of utilization is the level you typically have in a recession. Historically, the CapU rate has to rise to about 80 percent before executives begin to really ramp up hiring and expansion plans. It will likely take another year or two of growth before we reach those levels.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .
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