The Bullish Case (Followed by Bearish Comment)

By on July 14, 2010

Dave Kansas at The Wall Street Journal in a piece entitled “Why the Doomsayers are Wrong,” recently provided the case of the bulls in five bullets:

1. Excessive pessimism
When the pace of activity slows, it feels worse than it is. It’s like driving in the city after hours racing down the highway. This entire recovery has been underestimated from the word go.

According to Merrill Lynch economists, the consensus expectation for the annual rate of GDP growth during the first three quarters of the recovery was 2.5%. It came in at 3.4%. Similarly, corporate profits have far exceeded expectations.

It’s fair to say that the national mood is churlish. That plays out in the political arena, but it also plays out in how people perceive the economy and their own fortunes. So, confidence data are reading far more darkly than the fundamentals would seem to merit.

2. The Fed on hold
Investors have been incorrectly trying to anticipate when the Federal Reserve will start raising interest rates for months now. At the start of 2010, The Wall Street Journal’s survey of economists showed that most anticipated the Fed would start boosting rates in September.

That’s almost unthinkable today. Indeed, J.P. Morgan Chase recently changed its forecast to push the first rate move to the end of 2011, from April 2011. That means excessively low interest rates will remain a positive force for both the economy and the stock market for an extended period.

3. Jobs set to improve
This is the big X factor for the outlook, and job-data optimists are difficult to find. The June jobs report disappointed, adding kerosene to the double-dip fire. But looking closer, Deutsche Bank recently argued that “fundamentally we have the ingredients necessary for a rebound in hiring.”

Among them: a “boom” in temporary work, “record cash hoards” and a stronger-than-expected profit cycle. Moreover, the Household Survey, a government report used to calculate the unemployment rate but not the monthly jobs figure, has already started to show strong job growth.

4. Consumer not so weak
No question that everyone’s been more thrifty, but the period of retrenchment has eased as savings accounts have been rebuilt. In May, retail sales fell 1.2%. But that means retail sales are still growing at a 5.8% annual rate so far in 2010, which isn’t shabby.

Despite the downturn in May, most economists anticipate that consumer spending will continue to rebound, especially if the jobs picture starts to improve.

5. Stimulus still to come
It seems a long time ago that the stimulus bill passed (well, it was way back in early 2009), but the government has been slow to spend the dosh.

The government still has a little less than half of the bill yet to burn through, or roughly $380 billion. And regardless how you feel about stimulus spending from an efficacy or political perspective, the money still has an impact.

Ian Shepherdson at research firm High Frequency Economics points out that the remaining stimulus spending is the equivalent of 2.6% of GDP. He forecasts that the U.S. economy will maintain a 3% growth rate this year, mainly due to this spending.

SMA Comment: As a counterpoint I’ll post the bearish case from a reply from “Nancy” at Trader’s Narrative.

Also, the context is very important here: back in Mar-09 we were down more that 50% from the ‘07 peak and at least there was hope, but now we are up more than 60% from ‘09 trough and in the mean time, unemployment is way higher and there’s no hope in sight, consumer credit is contracting, and the rate of contraction is accelerating, M3 is contracting, not only that both PPI and CPI are showing the roots of deflation, but CPI is going down at a much accelerated pace than PPI = no pricing power at the end of the food chain, vacancies and lease rates at US shopping centers continued to get worse, office vacancy rate climbs to 17 year high, pending home sales index, based on contracts signed in May, fell to a record low 77.6, food stamps at all-time high, IL and CA are about to default on their debt …. and so on. By the way, do you remember 1987 and the concerns at the US budget deficit trajectory ? Now take a look at present-day USA.

Source: The Wall Street Journal

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