Recently with the assistance of SEI Investments, we prepared an updated economic update titled: Economic Recovery 2010 Part 2- Is the Glass Half Empty or Half Full?
This presentation is best seen in the video link embedded here. In case you are not able to play it- the script follows.
First I want to provide an overview of the current market conditions
Next, consistent with the title of this presentation – is the glass half full or half empty — we’re going to look at the economy from two perspectives.
First we’ll address some very good reasons to be optimistic. But in spite of those encouraging signs, there are reasons for caution. We want to make sure you get the full picture.
Finally, we’ll offer some ideas on how all of this impacts you as investors.
Let’s start with some good news. As you know, you can’t be sure there is a recession until it’s well underway and you’re not sure it’s ended until well after the fact.Now let’s look at some reasons for us to be optimistic, beginning with GDP or Gross Domestic Product, which is a measure of the total goods and services produced in the United States in any given period. This chart shows annual GDP since 1981 through second quarter 2010.
The National Bureau of Economic Research declared recently that the recession, which started in December 2007, ended in June 2009. That’s 18 months – a record – as you can see from this graph.
Not only has the recession ended, but so has the post-recession rebound we saw in 2009. We are now in a period of slow economic growth. The recession was sufficiently deep and long that coming totally out of it will take some time. We enjoyed a quick rebound last year and now we face what appears to be a long, slow and sometimes bumpy ride to a full recovery.
The good news is that while the growth is slow – there is, indeed, growth!
It’s also clear that a double-dip recession – feared by some economists earlier this year – although possible, is not likely.
Look where GDP dropped off sharply in 1982, 1991 and 2001. Each of those down years was followed by sharp increases in GDP. Historically, that’s been the pattern: sharp declines in production are generally followed by rapid improvement.
Look at the last few years. GDP has been dropping steadily since 2004 and took a sharp turn south in 2008. In 2009 it began to turn around and we’ve now experienced four consecutive quarters of economic growth. Granted, that growth has slowed in the last two quarters, but we ARE growing. I think that’s the message here.
Next, let’s look at manufacturing. This chart shows the Purchasing Managers Index, which is a very reliable measure of manufacturing activity. Purchasing and supply managers for manufacturing firms are surveyed about their purchasing activities to measure their pessimism or optimism.
A score of 50 or above for the Purchasing Managers Index means that a majority of the managers are optimistic and have increased their purchasing because they anticipate increased orders and business expansion.
As you can see from this graph, the results from September 2009 to August 2010 are all above 50. That’s 13 consecutive months of growth in manufacturing. That bodes very well for our economy and eventually the creation of new jobs.
There is also good news to be gleaned from the financial markets. Equity markets have rebounded from their first quarter doldrums and the bond markets have been consistently strong this year.
The good news is that the worst fears about foreign markets – especially in Greece and Spain – appear to be behind us. Europe, which appeared very unstable six months ago, appears to have stabilized, including the banks, which recently passed their stress tests.
Our focus on foreign and emerging markets underscores the evolving nature of our global economy. The United States is no longer an isolated nation who controls its own economic fate. The global markets have become too interdependent for that. A return to full economic health in the United States will be a function of a broader recovery in places like Europe, Asia and the Americas.
Now let’s look at the glass from the other perspective.
For every piece of good news, there is bad news, especially in the job market. Unemployment, a trailing indicator, is stuck at high single digits. It was 9.6% in September, unchanged from June. Granted it’s down sharply from the crisis levels of 2008 and early 2009, but not anywhere close to acceptable.
What we’re hearing about job creation is to not expect a lot of improvement, at least over the next six to 12 months. The pace of economic growth is sufficiently slow that any meaningful growth in jobs will be hard to come by, until the second half of 2011 or even 2012.
Also holding the economy back is the lack of improvement in the housing market. There are any number of ways to look at the market, including new construction, the sale of existing homes and the price of newly built homes.
These tables show the prices for existing homes. Look at the top table first, and you can see the catastrophic drop in home values from 2007 to 2009.
Now look at the bottom table, which shows prices and the percentage change from August 2009 to July 2010. You can see a steady drop in values from August 2009 through April 2010, although the pace slowed considerably.
In April, we got a nice bump (3.9%), but it’s been almost flat since then. So it appears that the market for existing homes has hit bottom, but we have yet to see any meaningful improvement.
We’re going to be watching that too going forward.
There’s another thing we need to keep an eye on as the economy works its way through recovery – the possible expiration of the Bush tax cuts.
The Obama Administration is proposing major revisions to the tax code that will have a meaningful impact on a broad section of American taxpayers, especially those in higher income brackets.
As we look at the table, you’ll see the reduction in marginal tax rates that were implemented in 2001 and 2003. On the right you’ll see the proposed changes to those taxes.
First, the plan is to roll back tax cuts affecting high-income taxpayers — couples earning more than $250,000 and single filers earning more than $200,000. Additionally, the top two tax rates would increase from 33% and 35% to 36% and 39.6% respectively.
Other proposed changes include:
• Reducing personal exemptions for couples earning more than $250,000.
• Increasing the 15% rate on capital gains and dividends to 20% for taxpayers in the top two tax brackets.
• Eliminating some exemptions on estate taxes.
Clearly these proposed changes will impact the recovery and your financial plans. Fortunately, your advisor can help you manage your taxes, especially those on capital gains and dividends. I encourage you to talk to your Trusted Financial Advisor about this if you haven’t already.
So we’ve looked at the glass as half full and as half empty. We’ve pointed out that there are reasons to be optimistic and there are reasons for us to be more cautious.
We need to recognize that economic growth will come stubbornly for the remainder of the year.
That fact has consequences for the job market. Due to the slowing pace of economic expansion, we’re not likely to see significant job growth until the second half of 2011 or even 2012.
So is the glass half full or half empty? I’ll let you decide for yourself. But I prefer to look at things positively, so while we need to be cautious, it’s reasonable to have faith in the resilience in the economy and an eventual return to full economic health.
Regardless, I’d like to remind you that you’re not alone in sorting through this. I’m here to address your concerns and to keep you on track. If you haven’t already, I can help you review your goals, reexamine your risk tolerance and encourage you to remain invested for the long term.
Thank you and I look forward to speaking with you soon.