Over the past few months there has been a significant amount of unsettling news that has caused anxiety over the sustainability of the economic expansion.
The May and June employment reports indicated less-than-expected job growth in the private sector. Retail sales have been disappointing, and taxes are likely to rise. Many fear that if the employment situation does not improve the economy will once again drop into a recession.
Also, Greece needed bailed out in order to avoid a default on its debt, and many worry that other European countries will also require assistance.
BP’s oil rig explosion and resultant oil spill in the Gulf is the largest in U.S. history. And while most agree that some increase in regulations of the financial sector is needed, there is disagreement as to the best way to accomplish a reduction of risk in the sector.
With the memory of the severe market drop of 2008 and the first quarter of 2009 still fresh in everyone’s minds, these issues have caused individuals and corporations to become extremely risk-averse. Holdings in cash and other short-term investments that are perceived to be low risk have skyrocketed to record levels.
However, the economy is on the road to recovery, as most economic activity is still steadily improving.
In May, monthly railroad shipping volume grew by 15.8% and industrial production rose by 7.6% compared to the previous year. Corporate profits are growing, driven by strong exports.
Companies are still reluctant to add new employees, but those with jobs are earning more and working longer hours. As a result, personal incomes have risen for seven consecutive months. Individuals are in better financial shape and are saving more and borrowing less. Even credit card delinquencies have fallen to a five month low.
We have been saying for some time that this recovery wouldn’t be a fast recovery like those that normally follow a recession.
But eventually confidence will return and corporations will begin to spend on capital equipment and labor. This will improve consumer sentiment and consumers will begin to spend and invest in stocks again.
We are sticking to our outlook of a slow, sustained recovery, but the gloom pervading financial markets suggest the recovery will be a long, painful process. The stock market will likely continue to be very volatile until both consumers and corporate leaders gain more confidence that the recovery is sustainable.
