Column: Economic Musings
Preliminary estimates of 2009 first quarter GDP suggest only a slight improvement from 2008’s fourth quarter (-6.1 vs. -6.3); however, the massive federal stimuli coming forward point to a possible leveling and then rebound in the quarters ahead. Much of the last quarter’s contraction centered on decreases in exports (-30%) and a reduction in inventories held by domestic businesses (-2.79%). Imports also declined as economic activity slowed worldwide. Reductions in automobile output accounted for nearly one fourth of the overall contraction. Meanwhile prices leveled, decreasing just 1% over the quarter after a sharp 3.9% decrease in the fourth quarter. Similarly, personal consumption rose 2.2% after a 4.3% decrease in the fourth quarter. Most importantly, real disposable personal income (adjusted for inflation and taxes) rose a very strong 6.2%, setting the stage for a rebound in consumer spending.
While the U.S. has substantial problems in the banking and finance area, the rest of the world has not been excluded from these problems. Europe in particular, having made many loans to Eastern Europe and other less developed parts of the world, has banking problems. Austria has, as an example, loaned twice its Gross National Product to Hungary. There has been a difference in approach, with the U.S. directing $3.5 trillion of stimulus to the U.S. economy. Much lesser amounts are so directed by the European nations led by France and Germany. However, Europe has much broader social safety nets than the U.S. (unemployment compensation, medical care, family allowances) and this in part compensates for less stimulus spending. Parts of East Asia, led by China and India, appear to be recovering faster from the worldwide downturn than the rest of the globe. In India, the re-election of the Congress party has given the Indian stock market a 17% increase in just one day. Recovery in these major Asian markets will have a beneficial effect on the U.S. and Europe as well.
Crude oil has extended its trading range to the upside having hit $60 several times in recent days. It does appear November was a bottom and a turning point and that crude is working its way higher. OPEC did not further cut production at its last meeting, but does have a meeting coming up May 28. While there is no apparent present disposition for further OPEC cuts, price action of crude will determine what happens. Substantially lower crude prices were felt throughout the alternative energy market with many projects (i.e., wind power, solar power, tar sands, etc.) put on hold or terminated. As the crude price has gradually moved up, some of these projects are coming back on line. Because of a slow-down in alternative energy and substantial cutbacks in drilling for conventional crude and natural gas owing to lower prices, it is safe to assume that higher oil and natural gas prices lie ahead. In addition, lower gas and oil well drilling has caused a 10%-15% drop in drilling costs. This combination is obviously positive for the prices of oil, gas and drilling companies.
Money supply continues to expand while risk-averse investors favor U.S. Treasury securities. Treasury Bills carry yields near zero, the 10-year 3.10%, while the 30-year offers 4.10%. These rates reflect a rapid increase since year-end but they are quite low by historical standards. The Government is issuing larger amounts of debt which, unless there are unusual liquidity concerns, will ultimately lead to much greater inflation. The question for investors then becomes one of timing and sector when committing funds. In summary, even though yields are expected to work upward, investors should avoid U.S. Treasuries in general and buy corporates, high yielding agencies and consider municipals.
Equity markets continued to build on the rebound begun in early March, rising a further 11% (as measured by the Dow Jones Industrial Average) between the end of the first quarter and May 15. With this recent rebound, equity markets have largely erased the January to March losses and now stand near breakeven for the year. As credit market activity has returned to something closer to normal (for example, the closely watched London Interbank Rate has returned to historical trend levels), and consumer confidence has risen, equity market participants have become less fearful, thereby allowing valuations to return to more reasonable levels. Whether these recent gains can be sustained will depend largely on continued restoration of fundamental economic activities. Some well-selected equities will continue to do well in the years ahead.
A well-grounded and thoughtful Catholic, Los Angeles-based founder and CEO of Chelsea Management Company, Mr. Fred Ruopp, Sr., is ranked by Kiplinger's as one of the... MORE »