2013-04-26

Swanson's Scorecard: Slow patch or recession?


After months of upward movement, US stocks markets have begun to struggle to keep pace.

The flow of economic data has not been helpful in this regard. We have not seen the kind of reassuring reports we were hoping for. US jobs numbers have been weak and durable goods orders have declined. Manufacturing indices in the United States, the eurozone and China dropped in March, perhaps foreshadowing worsening economic trends to come. And, last week the International Monetary Fund cut its global growth forecast for the year. What to make of all this?

Well, as I see it, we could be confronting the beginning of another recession, or, like last year, US economic growth could merely be entering a bit of a slow patch in an otherwise upward trajectory. To help put things in perspective, as I do each month, I am relaying some key findings from my research on corporate profits and the US economy in general. Now let’s turn to my five preferred indicators for a more thorough view.
  1. Corporate health: After a recession, profits tend to rise dramatically for two or three years before slowing to a moderate rate of growth and then beginning a noticeable decline well in advance of the next recession or end of the cycle. Now that we are in the fourth year after the last recession, rapid profit growth has certainly slowed. First-quarter profits from companies in the Standard & Poor’s 500 Stock Index have risen, but the gains have noticeably subsided, and revenues are barely growing. This pattern is typical, but the decay in growth rates, especially on the revenue side, cannot be ignored.
  2. Consumer resilience: The consumer has held up well since 2009 thanks to longer work weeks and better credit conditions. Looking ahead, consumers should benefit from the recent drop in commodity costs — most notably in gasoline and electricity. Keep in mind that car sales have continued to rise even amid this slow patch.
  3. The cost of capital: Central banks are keeping rates low, and the recent slowing data only underlines this trend. Expectations are rising for further rates cuts from the European Central Bank, the Bank of England and perhaps even from the Reserve Bank of Australia. I don’t however believe that there is an immediate risk that rates will rise or that the cost of capital will increase in 2013.
  4. Exports and trade: World trade, as measured by containers, ship movements and rail cars is not robust but is better than last year and still seems to be ticking upward.
  5. Housing: This sector of the US economy continues to be one bright spot. Housing affordability is running high, rents now exceed home ownership costs, inventories of unsold homes are falling and we are seeing home prices rising in most markets. All of these trends in the housing market suggest better times are ahead for the labor market, which during the last recession, was hit by significant job losses from the housing sector.
Given that world economies are slowing, the typical culprits that kick off recessions are absent. We are not seeing excesses in credit, rate increases or bubbles. The slowing, on the other hand, has put the current crop of world central bankers on alert, which should ensure that they keep easing in order to hold rates lower for longer. Such an assurance of available credit should support risk assets.

No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.

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