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1) GDP breakdown
The second estimate of the fourth-quarter increase in real GDP is 0.2% higher than the
advance estimate at 5.9% annualized, primarily reflected upward revisions to private
inventory investment, exports and nonresidential fixed investment that were partly offset
by an upward revision to imports and downward revisions to personal consumption
expenditures and to state and local government spending.
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The trend is definitely improving. The next 2 quarters will tell us whether we may get
into a second dip recession. Today, I tend to give the GDP the benefit of the doubt.
The Conference Board Leading Economic Index increased 0.1% in February (+0.3% in
January and +1.2% in December) pointing to a slow recovery, but a recovery
nonetheless.
Ken Goldstein, Economist at The Conference Board: “The indicators point to a slow
recovery this summer. Going forward, the big question remains the strength of demand.
Without increased consumer demand, job growth will likely be minimal over the next few
months. ”
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2) Consumption
Personal disposable income has grown for 5 month in a row until it decreased
in January due to an increase in federal non-withheld income taxes according
to the Bureau of Economic Analysis. At the same time, the personal consumption
expenditures went up for the 9th consecutive month in January (+ $52.4 billion).
The personal saving rate decreased to 3.3% from 4.2% in December, but is now in solid
favorable territory, even if I would like to eventually see it in the 7-8% region.
The trend is positive. In my opinion, pay checks given by the Bush and Obama
administrations were used to repair households’ balance sheets during H1 2009, and now
we are witnessing a non-subsidized consumption growth.
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3) Unemployment
The diffusion index for the total private sector dramatically improved to 48.0
in February vs. 44.2 in January, 39.6 in December and 17.1 in February 2009 (50 percent
indicates an equal balance between industries with increasing and decreasing
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employment). The diffusion index for manufacturing jumped to 54.9 in February vs. 40.9
a month earlier.
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4) Banks’ lending
In February, banks continued to shrink commercial loans for the 16th month in
a row, shedding an additional $17 billion; total commercial loans outstanding are back to
the summer 2007 and $345 billion below the peak reached in October 2008 ($1,645.6
billion).
Whilst this is negative for growth as a whole since less credit is available, I
take it as a favorable element in what was an economy built on over-
indebtedness steroids, particularly at the household level, and the system has
to be purged.
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The balance of net export of goods and services dramatically improved, whilst higher again
for the last two quarters, to represent a $449 billion deficit. This suggests that the US
trade deficit will have a long way to really get any closer to being balance.
Conclusion
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July and again in January/February to go back to their previous high and extend to new
post crisis highs.
I conclude that equity markets are not disconnected from the real economy
and there no reason, under the current circumstances, to fear a market
collapse. The S&P is however no longer cheap and, despite a good earning season, I
would continue to selectively buy on weakness quality stocks having displayed
their ability to pay dividends. I would favor energy (oil in particular), technology
and consumer companies with worldwide brands (P&G, Nestlé, Unilever, J&J for
example) as well as “progressing” markets (terminology that I prefer to emerging)
and stay wary of bank’s stock at least in the “regressing” world (i.e. developed).
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Monetary policy will remain accommodative until the real estate market has
fully recovered and don’t forget, “never fight the FED”. As my friend, Jacques-
Henri Gaulard, Managing Partner of Autonomous Research – a top notch independent
research firm specializing on the financial sector -, says about interest rates: “we have
moved from L4L to L4E – Low for Longer to Low for Ever…”
Sources:
FullerMoney
http://www.fullermoney.com
Autonomous Research
http://www.autonomous-research.com/x/default.html
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