I think we all should take a moment for a collective sigh of relief: We have averted a possible financial catastrophe in 2009. The economy is finally showing signs of improvement while the stock market continues to shrug off less than positive news and climb higher. Though September is typically the worst month of the year for the stock market on a historical basis, there is no denying the many examples of a recovering economy. While many areas of the economy are still hurting, I wanted to take this opportunity to highlight a few areas of business that suggest a rebound may be underway.
The Housing Market: As the original catalyst of this recession, there will be no general recovery without a recovery in the housing market. So it is quite comforting that sales of existing homes in the United States in July rose 3.2%, which was more than forecast. This marked the sixth straight month of increasing home sales, thus reinforcing the view that the housing market is steadying. Compared to July of 2008, sales in the same month this year were up 13%. These are very encouraging statistics that suggest the housing market has bottomed out and is slowly improving. Though August numbers will not come out for a couple of weeks, low borrowing costs and declines in prices will continue to entice buyers into the market.
Manufacturing Sector: Companies in the manufacturing sector are major employers of the middle class, and an economic recovery will hinge on the middle class trusting their job security and therefore spending again. Fortunately, across various areas of manufacturing such as factory expansions and car sales, there have been encouraging signs of a turnaround. Last month, the manufacturing sector grew for the first time in 19 months. As of now, the manufacturing index sits at 52.9, a number which exceeded forecasts and is the highest level since June of 2007. A score of 50 is the dividing line between expansion and contraction, which means that factories have finally crossed into an expansionary phase. The manufacturing sector is the backbone of an economy, so this is certainly uplifting news.
The cash-for-clunkers incentive will not exist to help September’s numbers, and the manufacturing index is likely to show a slight dip this month as a natural reaction. However manufacturing sectors have been improving around the world, not just in this country. China’s factories expanded more in August than in any of the previous 16 months, which means the country expects other large nations such as ours to have the means to import their products. In addition, European manufacturing shrunk by the least amount in over a year, which suggests stabilization as well. In a world with a highly globalized economy, improvements in other countries are likely to positively impact the United States too.
Mergers and Acquisitions: While individual mergers and acquisitions may seem somewhat unimportant to the broader economy, the frequency of these arrangements is actually a great predictor of an economic recovery. There has been a recent flurry of M&A announcements such as the Walt Disney Company purchasing Marvel Entertainment for $4 billion a few days ago. These deals are signs of economic health since they show the purchasing company’s confidence that the investment will prove profitable as the consumer returns to stores. Acquisitions also demonstrate the acquiring company’s ability to pay as well as value in the company being purchased. The M&A market has been barren for almost a year, so these large deals may signal a bottom for this market.
Of course we are all familiar with the bank mergers as well since many of us have witnessed the name of our bank change. While no one likes to see his or her bank fall into the arms of another due to financial woes, the vast majority of the newly formed banks have been steadily paying off TARP money. This week, Bank of America offered to repay part of its bailout money, and Wells Fargo followed a day later to announce that it intends to return $25 billion in federal money. Since the government will only allow banks with improved capital bases to pay back TARP funds, these announcements indicate that banks have become much healthier in the recent months.
Stock Market: The fear and volatility of the spring now seems like a bad nightmare and the stock market has woken up to a nice rebound. The S&P 500 has posted a 48% return since the 12-year low on March 9th. While the recent run-up may have been a bit too much too fast, stock valuations are returning to more normal levels and investors are opening their wallets to buy the stocks of the companies that keep our country running.
Earnings announcements in the past couple months have been encouraging, and more than 74% of companies in the S&P 500 beat 2nd quarter earnings expectations. Analysts set very low bars for these companies since everyone feared the worst, so beating these expectations was not a difficult feat. However we are all still relieved to see so many companies displaying resilient earnings data. The second quarter’s losses were less than the first quarter of this year and almost every analyst expects the current quarter to extend this trend. In fact, many companies are expected to post a profit (go figure!) As the financial statements start to look healthier, stocks are likely to climb higher.
Labor Market: To envision the coming recovery in the labor market, one only has to look at the trends in the GDP. In the first quarter of this year, the GDP contracted a scary 6.4%, but the second quarter saw a contraction of only 1.0%. The current quarter is expected to post a GDP growth of 1.6%, and with growth comes jobs. But the jobs will not come quickly or soon. The labor market is usually a lagging indicator since companies hesitate to add workers back to the payroll before they are sure that the improvements will endure. However, the labor market is already showing signs of life: The number of people filing for unemployment claims fell last week by 4,000 to 570,000. Though unemployment is likely to remain around 10% for a few more months, strong earnings and a growing economy will begin to bring unemployment down to acceptable levels.
In these markets and others, we are seeing signs that the economy is slowly recovering. I do not suggest that we are completely out of the woods, but it is certainly nice to see an abundance of positive news after months of struggle. It is important to remember that the economy still has many hurdles to clear and problems to solve. But hopefully the widespread fear of early 2009 will become a distant memory and companies will begin to take risks, hire workers, and invest again.
