The U.S. economy in the second half of 2009 should show positive growth in gross domestic product. Due mostly to inventory drains created by public spending, many businesses will place orders to restock their supplies. However, to predict what may come in 2010 is extremely difficult due to an unusual number of factors at play, especially government spending. Investors should be wary of equity markets as they seem to have been pricing in the certainty of a robust rebound. That does not mean that there are no good stock picks to be made; rather, one should not rely on index or sector funds or diversification without some type of downside protection, like put options.
The growth that will come in the second half of 2009 may prove ephemeral. Although inventories will need to be replenished due to stimulus programs like “cash-for-clunkers,” a sustainable recovery cannot be had without increases in real personal income, real manufacturing and wholesale-retail trade sales, industrial production and payroll employment. Further, an increase means real positive growth in these numbers, not simply the “less bad” figures that have driven the market rally thus far.
By the middle of 2010, the inventory restocking should be over, but also, much of the $787 billion stimulus of the American Recovery and Reinvestment Act of 2009 will be spent. How those two factors will play against each other remains to be seen and is difficult to forecast because we have very few historical examples to draw on. The recession of the 1970′s offers some similarities, but there was no massive stimulus package then. Moreover, private demand is likely to remain weak, and the irony of so much public spending is that it tends to crowd out private spending even when there is demand.
The relief that a catastrophic financial meltdown has been averted is reasonable; as is the pop-up in equity markets from their March 2009-the-world-is-coming-to-an-end lows. But the question that markets are just beginning to be troubled by is: Where is sustainable growth going to come from? Public spending may have saved us from ruin, but going forward, it will do more harm than good.
Investors interested in opportunities stemming from the U.S. stimulus package may be interested in the following post: U.S. Fiscal Stimulus: Analysis for Investors.
Economic Growth Coming, But Not at Levels Expected by Equity Markets
Posted by Gregg Killoren on August 19, 2009
The U.S. economy in the second half of 2009 should show positive growth in gross domestic product. Due mostly to inventory drains created by public spending, many businesses will place orders to restock their supplies. However, to predict what may come in 2010 is extremely difficult due to an unusual number of factors at play, especially government spending. Investors should be wary of equity markets as they seem to have been pricing in the certainty of a robust rebound. That does not mean that there are no good stock picks to be made; rather, one should not rely on index or sector funds or diversification without some type of downside protection, like put options.
The growth that will come in the second half of 2009 may prove ephemeral. Although inventories will need to be replenished due to stimulus programs like “cash-for-clunkers,” a sustainable recovery cannot be had without increases in real personal income, real manufacturing and wholesale-retail trade sales, industrial production and payroll employment. Further, an increase means real positive growth in these numbers, not simply the “less bad” figures that have driven the market rally thus far.
By the middle of 2010, the inventory restocking should be over, but also, much of the $787 billion stimulus of the American Recovery and Reinvestment Act of 2009 will be spent. How those two factors will play against each other remains to be seen and is difficult to forecast because we have very few historical examples to draw on. The recession of the 1970′s offers some similarities, but there was no massive stimulus package then. Moreover, private demand is likely to remain weak, and the irony of so much public spending is that it tends to crowd out private spending even when there is demand.
The relief that a catastrophic financial meltdown has been averted is reasonable; as is the pop-up in equity markets from their March 2009-the-world-is-coming-to-an-end lows. But the question that markets are just beginning to be troubled by is: Where is sustainable growth going to come from? Public spending may have saved us from ruin, but going forward, it will do more harm than good.
Investors interested in opportunities stemming from the U.S. stimulus package may be interested in the following post: U.S. Fiscal Stimulus: Analysis for Investors.
This entry was posted on August 19, 2009 at 7:25 am and is filed under Economy. Tagged: American Recovery and Reinvestment Act of 2009, Economy, Fiscal Stimulus, Market Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.