Good News And Bad News

6/20/2011


If you don't understand the signals of the U.S. economy, join the club. New data hits the market every day, leaving many investors fat with knowledge yet lean in understanding.

We don't have all the answers, but in the following space we will try to interpret the economy in two key areas:

Growth

Bad news: Consensus estimates for 2010 and 2011 economic growth are falling.

Good news: The Blue Chip Economic Indicators consensus for 2011 growth in gross domestic product (2.6%) is near the 25-year average, while the 2012 consensus (3.1%) is just below the 50-year average.

What it means: The recovery is losing steam, but we're still a long way from a double-dip recession. Low consumer confidence and fiscal woes in Europe are just two of the many concerns weighing on U.S. investors. But both consumer spending and business output continue to rise, albeit more slowly than many would prefer.

Investors don't like hearing about slow growth. It's not as fun as fast growth. But the stock market can rise even when the economy expands at a modest pace. In rolling 12-month periods since 1980, the S&P 500 Index has averaged a 16% price gain when GDP rose 3% to 4% but a very respectable 12% when GDP rose 2% to 3%. If GDP growth slips below 2% the picture gets uglier, with the index averaging a gain of less than 1%.

Labor

Bad news: In 2008 and 2009, the U.S. private sector lost nearly 8.8 million jobs.

Good news: Since the start of 2010, the private sector has added more than 2 million jobs

What it means: Private-sector payrolls have expanded in each of the last 15 months, suggesting that businesses are increasingly confident about their ability to generate revenue growth.

The unemployment rate topped 9% in May, and if payrolls continue to expand at the same rate they have over the last year, it will take another four years to replace the jobs lost in 2008 and 2009. Yet the consistent rise in payrolls is encouraging, and slow gains are better than no gains. If hiring continues at a modest pace, the condition of both consumers and businesses should keep improving.

Conclusion

It's tough to get excited about the state of the economy, and pundits of all stripes are lowering their expectations for the year ahead. However, with both economic activity and hiring still on the rise, it is too early to panic. Current Wall Street projections suggest the economy will settle onto a low-growth plateau, and a near-term recession seems unlikely. As long as economic growth remains in the 2% to 3% range, as most economists expect, stocks have the potential to generate solid returns.


ECONOMIC-GROWTH TARGEST FALLING

The Blue Chip Economic Indicators June consensus projects U.S. gross domestic product growth of 2.6% this year, down from 3.1% in March. The 2012 target has also fallen, though not as sharply. Source: Blue Chip.


ECONOMY STILL LAGS 50-YEAR AVERAGE


PAYROLLS ON THE RISE

In February, March, and April, U.S. private-sector payrolls rose by more than 200,000 jobs each month, a feat last accomplished in early 2006. While the 83,000 gain for May was disappointing, the upward trend remains intact.


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