Consumers Hold the Key
It all comes down to when those with jobs, and those with limited debt, have the confidence to spend more of their incomes.
Over the past seven months I have been very bullish on the economy and have raised my GDP estimates on several occasions. The improvement drama has played out exactly according to the script: Housing is stabilizing, manufacturers are increasing production and slowly rebuilding inventories, and exports are marching upward. While overall consumer spending has shown new life, the improvements have proceeded at a pace that can charitably be described as glacial, erratic, and hesitant. The improvement has been slower than I anticipated, but stronger exports have helped offset some of the disappointing results.
Overall, the economy's performance has amounted to a real turnaround story. We moved from GDP declining by more than 6% during the March quarter, to growth approaching 3% during the September quarter. As recently as April, the consensus forecast for September was 0.4%, with many economists anticipating a decline. We have come a long way fast. However, I am paring some of my short-term forecasts. I would be a bit suspicious of a market that has come so far, so fast, especially since the economy is moving into a stage that is more difficult to predict.
Low-Hanging Manufacturing Fruit Has Been Picked
Some of the low-hanging fruit that has fueled this recent economic growth has long since been plucked. At the end of 2008, many manufacturers cut production levels to well below already-depressed sales, exacerbating economic results. During the second and third quarters of 2009 manufacturers really had no choice but to raise production back to at least replacement levels.
Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.