What's Driving the Economic Recovery?
By Stephen Smith
May 7th, 2010
I’d like to start by looking at the performance of three major asset classes and their appropriate benchmarks: the United States equities markets, International equities, and the United States bond market. For the United States equities, I will use the S&P 500 index; for International equities, the MSCI EAFE index; and for the United States bond market, the Barclays US Aggregate bond index. As you can see, the United States equity markets out performed the International markets in the first quarter of 2010.
• S & P 500 5.6%
• MSCI EAFE 2.1%
• Barclays US Aggregate Bond 2.0%
The following factors have been critical in driving the United States economic recovery:
Corporate Earnings: Here you see a sharp recovery in corporate earnings that began even before sales turned up. Corporations aggressively cut costs laying off workers and closing plants. This is driving earnings as sales are picking up. The S & P 500 earnings are predicted to increase 54% from 2009.
Business Spending: As sales are picking up, capital spending is also increasing on facilities, equipment, and technology to stay competitive for future demand.
U.S. Employment: The unemployment rate is still close to 10% but looks to be getting better. Temporary employment is getting better and initial jobless claims are decreasing. Once corporations grow confident that the economy is turning higher, they increase full time hiring, usually after the recession has ended.
Housing Market: Housing prices which helped cause the downturn in the economy appear to be bottoming out by a number of measures. Inventories are down and the affordability levels have improved. March sales number rose over 25% but the tax credit is set to expire and mortgage delinquencies are still high; it’s a sector we are watching closely.
Federal Budget Deficit: The government has funded its spending by borrowing record amounts of money. In fact, the deficit or difference between taxes and spending is now approaching a trillion and a half dollars or more than 10% of GDP. Hopefully, as the economy picks up, our government officials will look to reduce this deficit.
