Blog

November 4, 2011

 TO: Our Clients and Friends

 FROM: Bob Runde

You said it, Dr. DeBondt!

Werner DeBondt was one of the speakers at a conference that Mike Parry and I attended in Chicago last week. It’s a semi-annual affair that in the past we have found quite useful. After these meetings, I have often shared with you some of what we heard, especially information that pertains to the economy and the financial markets.

 The range and depth of this particular meeting was unusually good, I thought. The topics ran from the unexpected (how to compassionately assist a grieving recent widow/widower) to the everyday (what’s going in Washington, D.C. and is there any hope – “not much,” speaker Andrew H. Friedman of the Washington Update, told us).

Some of the most relevant information came from an internationally known economist named David Hale of David Hale Global Economics, Inc. It’s primarily his comments and insights that I want to share with you.

 Hale was comprehensive in his presentation and more plain-spoken than many economists I’ve heard and read over the years. He was also somewhat less pessimistic than I expected.

 He dealt in some depth with both the good and the not-so. On the good side of the ledger:  We are enjoying a spectacular economic recovery in some ways. On the other hand, we’re also running into terrible headwinds. Corporate profitability has been very high over the past 12 months. However, that profitability has been caused by the great productivity increases that big reductions in the work force are bound to bring In other words, 9% unemployment has been great for businesses, terrible for the unemployed. 

 Hale believes that the US will not experience a second round of the much dreaded double-dip recession in the foreseeable future. He listed five reasons why he expects the economy to continue growing.

 1.) The recovery has been incomplete (because of high unemployment).

 2.) The Fed’s monetary policy has been very “supportive.”

 3.) Because “corporate profits are at a 50-year high,” there’s little need for additional layoffs (and sooner or later will result in a need to hire more workers).

 4.) Individuals are paying down debt and saving more; the portion of Gross Domestic Product (GDP) that is private debt has dropped from 14% at the peak to around 11% recently.

 5.) The banking industry has recovered substantially from its catastrophic 2007-2009 meltdown.

 If all of this doesn’t make you feel much better – especially with the incredible stock market volatility of the past few months – Hale wasn’t exactly jumping for joy, either. 

 He noted the “headwinds” that are holding our economy back: political stalemate in Washington; the “33% decline in house prices;” the Arab spring, which brought higher gasoline prices (and thereby squeezed consumer spending); the earthquake in Japan, which disrupted the auto industry for months; and some horrendous weather in the U.S. that caused various economic disruptions.

 It’s sort of two steps forward and a step backward. For example, while the private sector of the economy is creating 100,000 jobs a month (still significantly less than needed for healthy growth), it is offset by the loss of 20,000 government (federal, state, local) jobs a month on average.

 The take-away, I think, is that we are not out of the woods yet. We all knew that. But the forest may not be as dense as it seemed three, six or twelve months ago, Hale implied. If that’s not cause for a big celebration, things could be (and have been!) much worse.

 The financial markets will continue to be volatile for some time to come. However, remembering the events of fall 2008, just three years ago, this year is much more manageable.

 Robert H. Runde, CFP