Last week we learned that the U.S. economy expanded by a whopping 5.7% annual rate in the 2009 fourth quarter - the biggest jump since 2003. This was well ahead of the 4.5% consensus estimate and solidly beats the 2.2% growth rate achieved in last year's third quarter. The turnaround is the largest in almost three decades.
The main driver of the performance was a big slowdown in the rate at which businesses were drawing down their inventories. This alone contributed 3.4% to overall growth in the quarter. Paul Ashworth at Capital Economics in London believes that inventory rebuilding will continue to boost gross-domestic-product (GDP) growth for another two or three quarters.
But what happens after that - especially after the stimulus spending out of Washington winds down later this year? Will this rate of growth continue?
Investors who know the answer to that question will be the best-positioned to profit.
In an effort to get at an accurate answer, Capital Economics' Ashworth filters out the impact of inventories and external trade with other nations - and comes to a conclusion that will surprise many investors: The U.S. economy actually slowed in the fourth quarter! According to this proprietary gauge, the growth rate of U.S GDP dropped from 2.3% in the 2009 third quarter to a wheezing 1.7% in last year's final quarter.
That's a definite downer for investors who saw the GDP numbers as signal of better times ahead.
But don't despair: There's still plenty of room for optimism. Economists at ISI Group Inc. in New York recently highlighted evidence that a solid - if not terribly rapid - recovery remains on track here in the United States: Leading economic indicators continue to improve, earnings revisions remain positive, vehicle production is up, steel production is up, oil-and-gas-drilling rig counts are up, and semiconductor equipment sales are up. Exports are also improving - up 18.1% versus a 10.5% rise in imports - thanks to the increased competitiveness of the U.S. dollar.
Moreover, the ISI Group's private survey of corporate confidence continues to improve; in fact, ISI's survey of retailers moved to a new high this month, suggesting that consumer spending has bounced back.
The ISI Group notes that prior economic recoveries have either been fast or slow: Growth rates have fallen into one of two venues:
- 3.5% or less.
- Or 6.0% or more.
This time around, however, ISI is predicting a recovery that isn't slow and isn't rapid; instead, the research firm is predicting a middling economic recovery with growth of 4.5% this year and 3.5% in 2011.
Moving forward, business spending is likely to be the main driver of growth. Consumer spending is responsible for a record 71% of the economy, while capital expenditures by businesses make up only 9.5%. During the economic expansions of the mid-1990s and the mid-2000s, business spending swelled to upwards of 13% of GDP. We're already seeing early signs of this: Business investment expanded by 2.9% last quarter, driven by a 13.3% rebound in spending on equipment and software.
Stocks that could outperform are those with the most exposure to this trend, including:
- Caterpillar Inc. (NYSE: CAT).
- General ElectricCo. (NYSE: GE).
- And United Technologies Corp.(NYSE: UTX).
Also included on the list are technology and software names like OracleCorp. (NASDAQ: ORCL). I will continue to look for opportunities in these areas and report back when the time is right to take action.For more details on this key profit opportunity, check out my Strategic Advantage advisory service.
In summary, the irony of 2009-2010 could be summarized this way, if we're right: Last year, stocks improved as the economy slipped. This year, stocks will slip while the economy improves.
[Editor's Note: As this analysis demonstrates, Money Morning Contributing Writer Jon Markman has a unique view of both the world economy and the global financial markets. With uncertainty the watchword and volatility the norm in today's markets, low-risk/high-profit investments will be tougher than ever to find.
It will take a seasoned guide to uncover those opportunities.
Markman is that guide.
In the face of what's been the toughest market for investors since the Great Depression, it's time to sweep away the uncertainty and eradicate the worry. That's why investors subscribe to Markman's Strategic Advantage newsletter every week: He can see opportunity when other investors are blinded by worry.
News and Related Story Links :
- Money Morning News Analysis:
Semiconductor and Electronics Makers Anticipate a Bounce in Business Spending Next Year
- Capital Economics:
Official Web Site
- ISI Group Inc:
Official Web Site
A Beginner's Guide to Economic Indicators