Things Are Looking Up, Really

The underlying trends don't point to an economy coming apart at the seams.

Robert Johnson, CFA 08.08.2011
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Markets experienced one of their worst weeks since the recovery began as a result of spreading debt contagion issues in Europe, a messy resolution to the U.S. debt crisis, and what many viewed as weak economic news. Pundits jumped on and misinterpreted the consumer income and expenditures reports and an admittedly weak ISM Purchasing Managers Report. Meanwhile, a jump in auto sales, a steady decline in initial unemployment claims, and even a respectable jobs report went largely ignored. While I can't portray the economy as robust, the U.S. economy is certainly not about to fall back into the abyss.

I would characterize the economy as neither booming nor busting. At times it certainly felt like it was about to boom (after those stellar jobs reports of February, March, and April of 2011). At other times it looked more like a bust. Just last August we had a run of bad employment and manufacturing reports that spooked the Federal Reserve. After a run of bad reports, the Fed began to openly discuss QE2 (the government's program to repurchase long-term government bonds to reduce interest rates). Many of those very short-term booms and busts appear to be nothing more than statistical mirages. Those boom and bust conditions always seemed to revert to a steady state, slow growth economy that just isn't very satisfying. Worse, those at the bottom of the economic ladder appear to still be going backward. The unemployment rate for those with less than a high school education has increased by more than 1% even as the rate for the entire population has fallen.

To be honest, I've been in the booming camp for most of this recovery, which has made me look right about half the time and like a stubborn fool the other half. I will admit to a certain bullish bias about recoveries based on growing up in the 1970s. The U.S. faced then what I viewed as horrendous problems including double-digit inflation, a war lost, riots in the streets, and even a president facing impeachment procedures. Penn Central Railroad went bankrupt and New York City came awfully close. My view has been if we could recover from that, we could recover from just about anything. And periodically, data from this recovery have supported that view. However, a lot of government numbers have either been restated or partially flawed, further confusing the interpretation of where we are now, let alone where we are going. Nevertheless, I surmise that even with the revised data I would have stayed relatively bullish (though I was probably more bearish than anybody else on the second-quarter GDP forecast due to Morningstar's analysis of auto production data).

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Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis with Morningstar.

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