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Investing Specialists

A Bumpy Road to Recovery

Though indicators are still mixed, the economy looks on track to begin its recovery in the second half of the year.

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Nothing I saw in recent economic reports has dissuaded me from my belief that the economy is bottoming and that a second-half recovery will eventually be led by an improving auto sector and inventory restocking.

In the very short run, many of our indicators, including the ISM purchasing managers survey and initial unemployment claims, will be driven by short-term issues in the auto industry. I expect that as these indicators bounce around, the Street will react accordingly. However, in the long term, an improving auto industry, a stabilizing housing industry, inventory replenishment, and the stimulus bill could give the economy a better-than-expected lift through the middle of next year. At that point, my crystal ball becomes a little cloudier as there will be the potential for higher taxes and higher inflation to short circuit an otherwise improving economy.

Despite what I believed was a positive week for economic indicators, the Dow Jones Industrial Average was down almost 2% last week. Since the Dow peaked on June 12, it is down about 5%-6% after rising 39% from its March low. Given such a quick move in such a short time period, the Dow was probably a little ahead of itself. Furthermore, the major economic indicators moved from mostly positive and above expectations to a more mixed set of readings, and some major misses relative to expectations, over the last six weeks. In particular, the employment report, retail sales, and consumer confidence were not up to snuff, and the market reacted negatively.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.