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How Long Can U.S. Economy’s Sweet Spot Last This Time?

Economics / US Economy Feb 23, 2013 - 07:50 PM GMT

By: Sy_Harding

Economics Until recently, the recovery from the 2008 financial crisis and meltdown has been in stealth mode all the way, much of the country either unaware of the progress - or in denial that it was happening.

That’s even been true of investors, whose success depends so much on being able to separate the facts and reality from the static and noise. 

Statistics measuring money flow in and out of mutual funds show that many investors followed their historical pattern of holding on through the 2007-2009 bear market, suffering big losses, only beginning to pull money out in 2009, after the bear market had ended. Money was then pulled out of the market in each of the last four years, even reaching a record pace in the first six months of last year.

It’s been understandable.

It was thought in early 2009 that the ‘Great Recession’ was probably worsening into another Great Depression, and that the stock market, even though down 50%, had much further to go on the downside.

And although the recession ended in June, 2009, the recovery since has been a stutter step advance of several paces ahead followed by a stumble in the summer months each year, keeping nervousness alive.

The positive steps in the recovery were continuously reported in the headlines but repudiated.

Monthly job losses reversed to jobs gains – but not near enough to replace all those that had been lost. Real estate sales reversed from steady multi-year declines, and growing inventories of unsold homes, to impressive gains in sales and a declining inventory of unsold homes. But that supposedly couldn’t last because of the enormous overhang of foreclosed homes that would still be hitting the market. The epic government spending on bailouts of banks and the auto-industry that couldn’t possibly work, not only worked but were pretty much repaid with interest. But there was still denial of progress since the resulting government debt would surely bring the economy tumbling back into recession. The fear that unprecedented easy money policies would create spiraling inflation did not materialize – but that was due to the government manipulating the numbers. And on and on. Progress but denial that it was taking place.

Yet through it all the economy has been recovering, and the stock market, usually moving in advance of the economy, followed a similar stutter-step recovery of rallies and pullbacks, but has recovered all the way back to its pre-crisis 2007 level.

There have even been reports lately of progress regarding the remaining big problem of tackling the record government debt.

The bi-partisan Congressional Budget Office reported earlier this month that although the budget is still running at a deficit, and so the national debt continues to rise, the improving economy and other changes have cut the annual deficit in half over the last four years.

And some of that deficit-cutting has been the result of progress toward the smaller government and federal austerity that conservatives are insisting on.

As Tom Raun of the Associated Press wrote on Friday, “Without much fanfare or acknowledgement of the progress, spending by federal, state and local governments on payrolls, equipment, buildings, teachers, emergency workers, and core government functions has been shrinking steadily since the deep 2007-2009 recession.”

It also shows up in the monthly jobs reports of the private sector adding jobs while governments continue to cut jobs.

It’s too bad that so many investors have been unaware of, or in denial of the realties, and so have not participated in the stock market’s recovery, still pulling money out of stocks and mutual funds up until just a couple of months ago.

Because this sweet spot in the recovery is not likely to last much longer before running into its next rough patch.

In fact it’s becoming eerie how once again the economy, market, and even economic reports, are tracking so closely with the patterns of the last three years as the summer months approach. The market is experiencing an impressive winter rally, but recent economic reports are showing signs of the economy tiring again.

For instance, it was reported this week that U.S. housing starts unexpectedly fell 8.5% in January; the U.S. PMI manufacturing index fell from 55.8 in January to 55.2 in February; the Philadelphia Fed Index, often a precursor for the national index, unexpectedly fell to negative 12.5 in January, much worse than forecasts of an improvement to positive 1.6.

I and my subscribers remain on a buy signal for the market from last fall, but we are now watching those indicators closely given the similarity of conditions to those as March and April approached in each of the last three years.

We’re nearing the time it will be important that investors not become overly complacent or fall asleep at the switch.  

Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

© 2013 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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