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Investing Specialists

Recession Moves into the Rearview Mirror

The data almost uniformly moved in the right direction this week.

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I remain strongly bullish on the economy for the second half and early 2010. This week's economic indicators showed sharply decelerating deterioration (job losses, initial unemployment claims, purchasing managers' survey) and some data showed positive changes (hours worked, real hourly wages, existing home sales, factory orders), not just a slowing of decline rates. The data were almost uniformly in the right direction this week in contrast to prior months when a couple of specialized, early indicators were positive, but many more indicators were still going in the wrong direction.

My 3% second-half growth forecast, which was considered laughable just a month ago, is quickly becoming the consensus. Based on some very positive indicators this week, there is probably a case to be made for an even higher number, but I need to see some more corroborating evidence before I step out on that limb. The biggest real risk to my positive scenario is weakness in the commercial real estate sector and increased interest rates.

Despite a more balanced set of indicators this week, housing- and manufacturing-related statistics were still much stronger than the consumer, who remains in a bit of a funk. This week's most negative trend was that consumers continue to trade down in the items that they do purchase. None other than industry leader  Procter & Gamble (PG) noted the strong trend of customers trading down to lower-priced products. P&G is now developing new, more-basic products, including lower-cost versions of Tide, as the firm sees this as more than a short-term change in consumer behavior. High-end stores like  Saks (SKS),  Tiffany (TIF), and  Abercrombie (ANF) continue to show large double-digit declines, while the low end of the market, including various dollar stores,  TJX (TJX) and  Ross Stores (ROST), continue to show real gains. News out of the restaurant industry this week was also pretty bleak, even at the low end of the market.

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