Do you see the glass half empty or half full?
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If you’re anything like me, you’ve probably answered the former, but are worried that some butterfingers may drop the darned thing before you get the chance to assess its volume.
In my view, such is the nature of the current economy.
There are plenty of signs out there that point to the worst being over. At the same time, there are just as many indications we may be in for a long haul before any semblance of prosperity returns.
The most public face of our economy is the stock market. There is no question that the rebound in aggregate share prices has been nothing short of dramatic.
The Sun Seems to be Shining
After sinking to a 12-year low in March, the S&P 500 has surged nearly 45 percent. Additionally, the Conference Board’s measure of leading indicators has increased the past three months. The Board will release another update later today.
Leading the pack has been the profits posted by major banks like Goldman Sachs and JP Morgan Chase. For the second quarter, tech sector companies like chipmaker Intel boosted profits, prompting many analysts to believe we are heading for a stronger second half of the year.
On the wings of these second quarter numbers is a durable-goods report that showed a 1.1 percent jump in demand for goods that will last several years, like washers, airplanes and tractors. Excluding transportation equipment such as automobiles, this represents the biggest increase in four months.
A rise in durable-goods figures used to calculate economic growth generally reflects the intent of companies to increase their investments in coming months. Up to this point in the year, durable-goods demand has been negative to flat.
The fall in gold prices and the relative weakening of other major currencies against the U.S. dollar is also a marker that the economy may have turned a corner. The dollar has risen against the euro for the second time in as many days. The comparative value of the greenback also has climbed vs. other minor currencies such as the Australian dollar and even the Norwegian krone.
As positive as these indicators may be, the stock market has sold off the past two days after the Dow crossed a milestone above 9000 for the first time since last year. At the same time, Treasuries pushed higher, indicating that investors still may be harboring residual uncertainty about the stability of the economy and sustainability of the recovery.
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Revenues at Alcoa, the largest U.S. aluminum maker, and Exxon-Mobile declined on lower prices for metals and oil. Energy and raw-material producers in the S&P 500 posted the biggest losses among the 10 main industries in the S&P 500, each losing more than 1.8 percent. Exxon fell 1 percent to $71.18, while Alcoa slumped 1.5 percent to $11.09.
In general, commodity prices along with the demand for raw materials have continued to fall, which may signal that producers still believe that the demand for manufactured goods will remain soft to negative.
The Other Side of Profit Ledger
One of the few bright spots in the global economy has been China. For the past several months, it has remained the epicenter for marginal growth and demand. Following that nation’s aggressive stimulus program, stock values in China surged 79 percent.
Today, Chinese stocks plunged on speculation that the government will curb inflows into a market that had doubled from last year’s low. Share values tumbled 5 percent after reaching their highest valuations since January 2008.
On Monday, Philadelphia Fed President Charles Plosser warned that inflation may appear earlier than expected, despite the continued rise in unemployment. This may force Ben Bernanke and the Fed to rethink interest rates that could put a damper on the mini-recovery under way in the housing market.
Other than the major banks, most of the profits associated with the recently released earnings reports by the largest firms have been linked to cost-cutting measures as opposed to an actual expansion of sales. The drop reported yesterday in consumer sentiment may be emblematic of this systemic weakness.
The see-saw changeability in overarching consumer confidence has and will continue to be the Achilles’ heel of any lasting recovery. While the federal government has committed billions to reigniting the economy, and may inject more still before the year is out, these monies have yet to yield their desired impact – namely job creation.
If consumers are not confident because the job market remains wobbly, they will continue to be less willing to buy. With consumer spending making up roughly two-thirds of the economy, any rebound without consumers is likely to fare poorly.
Half full or half empty. It still may be too early to know.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
