Surprisingly, according to initial GDP reports for the second quarter, US GDP contracted by only 1% during the second quarter vs. a decline of 6.4% in the first quarter and a decline of 5.4% during last year’s fourth quarter. But, what is the story behind the decline of only 1%? It’s rather simple, inventories!
Inventory accumulation let to an unavoidable economic downturn in US manufacturing and now we are beginning to see the reverse. Inventory levels are so low that we will unavoidably see economic activity pickup in the manufacturing sector to rebuild those inventories. As a result, we are likely to experience economic growth over the next two quarters.
So far, according to CNBC reports, 74% of companies have reported earnings that top estimates, which could mean that analysts expected the decline in business activity to be worst than it actually turned out to be, or that analysts underestimated the ability of US companies to manage their business activity during this economic downturn by cutting costs.
Nevertheless, unemployment remains high and will likely exceed 10% by mid 2010. Whether this recent pick up in economic activity results in an increase of part time or full time employment remains to be seen. I believe employment is the key measure to sustainable economic growth; therefore, until we see employment numbers improve, the economy remains fragile. Because the US is facing high unemployment and higher taxes which don’t normally work in favor of economic growth and because they do not generate growth in disposable income, high employment is key to sustaining this GDP good news momentum given the current political and economic conditions.
But how can we improve employment, consumer confidence, and control oil prices at the same time? Should we have more regulation and taxes, or should we offer more incentives and tax cuts? Can we improve US net disposable income with high unemployment and higher taxes? And what about the housing market?
So far, I just see inventory levels low, I still do not see housing and unemployment numbers improve significantly just yet. I remain optimistic because I believe in the invisible hand, which I feel will work faster and more efficiently if left alone. Eventually, we will see economic activity pick up and housing and employment will improve. But we still need to see what will happen with health-care reform and how it will affect the US economy as a whole. I think we are still facing uncertainty in the markets and we have about another year to go before the government/business relationship becomes clear. Until then, I remain cautiously optimistic and would continue to look at emerging markets with open market policies that encourage economic growth and would be very selective to pick business in the US that won’t be surprisingly affected by government regulation. I would continue to concentrate on infrastructure and green energy for both, new employment and investment opportunities.
Share your thoughts, tell us how you feel about this current upward momentum and what you think these numbers really mean to you!
