Assessing the U.S. economic recovery right now is a bit like buying a used car: Although it sure looks good, you can't help but wonder what's really going on under the hood.
In terms of the U.S. recovery, here's what I see: The U.S. economic recovery looks good. And it is good. But the pace of that recovery is about to slow down – which is part of the reason that the U.S. stock market sold off and why the Dow Jones Industrial Average is down about 7% from where it was in early May (and that's even after the 5% rebound the Dow has seen from the June 7 nadir it established down around 9,800).
To put this into context, I had a long discussion about this topic with Lakshman Achuthan, managing director of the Economic Cycle Research Institute. Let me share his thoughts.
An Economy on Cruise Control?
Achuthan, the only economist with an admirable record of calling recessions and recoveries, says his data shows that economic growth has peaked for this cycle – which isn't anywhere near as bad as it sounds.
According to Achuthan, an economy that's recovering from a recession is akin to a jet aircraft taking wing: The jet's greatest acceleration occurs as it is zooming up off of the runway and headed for its maximum – or cruising – altitude.
Once the jet reaches that altitude at 30,000 feet, the pilot levels off and throttles back. But that just means the jet stops accelerating: It doesn't fall out of the sky – it just cruises to its destination.
And some of those flights can be quite long – and exceptionally pleasant.
Achuthan says that the stock market tends to halt the torrid pace of recovery about seven months after his ECRI Weekly Leading Indicator (WLI) stops rising. The WLI peaked in October, so the April plateau in stocks was right on schedule. The WLI fell quite vertically, however, and actually turned negative on Friday.
Achuthan says this could be a prelude to a new recession call, but noted that he won't be able to make that judgment for two months. In the meantime, he said only that all the fiscal-austerity measures in Europe are likely to put a lid on global economic growth – especially for commodity prices – which, in turn, can have a negative effect on global stock prices.
But there is some good news: For now, at least, the U.S. recovery continues to rock on at a pretty good clip. ISI Group Inc. in New York reports that its company surveys continue to show a powerful, broad-based surge in the economy that has not been as hampered by lack of employment growth as you might imagine.
Here's a quick list of positives and negatives to ponder until next time:
Positives: The yield curve is positive (cheap profits for banks); short-term interest rates are zero; profits have increased 31% year-over-year and corporate balance sheets are strong; household employment has increased by 1.3 million over the past five months (excluding Census workers), an increase of 2.4% on an annualized basis; hours worked have risen at an annualized rate of 3.7% in the past seven months ; employment is projected to keep rising over the next 12 months; vehicle sales and housing starts have room to move higher; inventories are very lean.
Negatives: The Eurozone economy is likely to enter another recession later this year; China's real gross domestic product (GDP) growth is likely to slow to 7.5%; U.S. tax rates are headed up; U.S. and state budget cuts and higher tax rates are likely; the BP PLC (NYSE ADR: BP) oil spill will lower economic opportunities in the U.S. Gulf Coast region; Israel and Turkey are fighting; European auto and retail sales are collapsing; Japan's political establishment is unstable; credit spreads are blowing out in Spain; and deep uncertainty about the U.S. economy is so great that a survey of a small group of large fund managers last week found that projections for the U.S. unemployment rate ranged from 6.5% to 14%.
A Profit Play to Consider
So, given this exercise in analysis, what's the bottom line for the U.S. economic recovery? Add it all up and ISI expects a growth in U.S. GDP of 3% to 3.5% GDP over the next year, which is consistent with the idea of what ECRI's Achuthan referred to as "cruising speed."
It's not a great cruising speed – which is what 4% GDP growth was seen to be during the 1990s. But it's certainly enough to support corporate earnings growth of 12% from smart, steady companies like medical-waste-disposal specialist StericycleInc. (Nasdaq: SRCL), an old favorite of the last decade that ought to find renewed popularity in this decade.
My conclusion is that that the sharp, robust, exciting advance in the broad range of stocks seen from March 2009-April 2010 is probably over for now, and even when equities recover from the recent troubles the next stage will be much more muted.
[Editor's Note: Money Morning Contributing Writer Jon D. 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.
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News and Related Story Links:
- Economic Cycle Research Institute:
Commentary: Economic predictor set to turn negative, spook market
- Phil's Stock World:
ECRI Weekly Leading Indicators Turn Negative
- ISI Group Inc:
Official Web Site
- Money Morning News Archive:
BP Oil Spill News Stories
Higher Trading Range Above $64.07 Detected for Shares of Stericycle (SRCL)