Whither the U.S. Economy?
Last week’s employment numbers were worrying; this week the indication seems that maybe jobs are increasing. Next week will tell us more and the week after that some more.Suddenly the market seems to be extra jittery about these numbers, and triple digit moves in the Dow Jones are a nearly daily occurrence. Why the sudden panic?After a monumental depletion of inventory in our economy, with “nothing left on the shelves” so to speak, the U.S. economy has benefitted from a significant inventory rebuilding. It has added meaningfully to GDP over the last two quarters.Now comes the moment of truth – will the consumer maintain the pace of acceleration in spending or are we entering a period of economic slowdown, incurring fears of a possible W shape to the economy (down, up and then down again before really getting back on track).Retail investors, who have been guarded in their return to the markets over the last 18 months, appear spooked by the recent volatility as indicated by the significant redemptions in mutual funds. And they have reason to be, despite some really good news.Here’s the good news:Corporate balance sheets for American companies are in great shape. Continued productivity gains are enhancing companies’ cash flow and profits.Earnings growth will be excellent this year and most likely again next year.To the extent that the stock prices reflect profits and the trend in earnings, the market’s correction we have been experiencing over the last month provides a good opportunity for long term investors.So what is the problem?The problem lies in the vast middle of our economy – those small to medium sized companies that are not publicly traded, companies which cannot get the access to capital as large companies can. Without their participation in the recovery, unemployment will stay unacceptably high, because those are the companies that make most of the new hires.In addition, State and local governments are being forced to make cut-backs because, unlike the private sector, their balance sheets are in bad shape and their cash flow is negative.And to top it off, the economic stimulus program is going to be winding down just as Federal taxes take a giant step up.I don’t believe these negative forces will result in another recession, but I am sure they will dampen demand at the margin. And the markets do not like uncertainty.But relative to where the economy and the financial system stood only 18 months ago, this is heaven. From my standpoint, that means that panic selling is an opportunity to buy stocks. I think we may have quite a few of those opportunities over the next few quarters.