The National Bureau of Economic Research (NBER) told us the recession ended June 2009, when economic activity stopped going down and turned up.
The problem is most people are still worried about their jobs, if they have one and the lackluster performance of the recovery so far. With unemployment fluctuating between 9.4 and 10.1%, and the underemployment rate near 17%, it is no wonder the news from the NBER received such skepticism. Even the Federal Reserve said consumer demand, bank lending and housing remain weak, especially for this stage of the recovery.
Consumers, large and small businesses face an uncertain future. Companies of all sizes are reluctant to hire additional people for fear they will encounter much higher healthcare costs along with new taxes. In place of hiring new people, most companies would rather invest in productivity improvements, as they will help lower costs and improve service.
Congress has not yet decided what they will do with the expiring tax cuts in 2011. Add worries about the upcoming election in November and what that might mean for future legislation. It is no surprise everyone lacks confidence in the direction the economy.
Recessions generally take place when the GDP turns negative for two quarters. When the GDP recovers turning positive, it is a sign the Recession is over.
Generally recover from recessions follows a robust path as growth accelerates in the early quarters and years. This time the pattern is different. Starting with the third quarter of 2009 the GDP grew at 1.6% before leaping up to 5.0% in the Q4 2009. So far so good. In the first quarter of 2010, the GDP growth rate slowed to 3.7%, followed by a meager 1.6% in the second quarter. This is why we hear many economists worry about a “double-dip recession.” Since the initial spurt, the economy has weakened significantly. Future prospects are mixed and from my perspective, we will continue to experience a slow growth economy that struggles to provide enough jobs for everyone who wants one.
The Federal Reserve in their latest statement stated:
Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months.
They further stated: the pace of economic recovery is likely to be modest in the near term.
If the Fed is concerned, business people and consumers will lack confidence in the economy. They will closely control their spending until their outlook on the economy becomes more positive. Without confidence in the future, the United States economy will continue to struggle. Until then it will feel like we remain in a recession.
What is an investor to do?
In this “muddle through” economy, the stock market will continue to trade in a wide horizontal channel. Within this channel, you can pick stocks buying at their low point and selling at their high. Moreover, certain subsectors and stocks that benefit from the rapid growth in emerging economies, especially in Asia and South America will offer the best opportunities. Caterpillar, Deere, Freeport McMoRan, Bucyrus, Joy Global and Flowserve are a few that will continue to outperform. Any company that offers alternatives to hiring additional employees will see growing revenues and profits. Look to companies like Oracle, EMC, Accenture, and Digital River.
Careful stock selection in the right sectors should provide investors with market beating results. Use the dips in the market to acquire shares of the quality companies. The rallies create profitable selling opportunities, or you can add down side protection at the highpoints. Take what the market gives you.
