The Green Sheet Online Edition
March 28, 2011 • Issue 11:03:02
The economy in recovery
With more than 18 months of slow-paced, but fairly consistent growth in many areas behind us, it seems safe to say the economy is clearly in recovery mode. Although some key economic indicators, such as employment and housing are still lagging, many others, including consumer spending and business investments and revenue, have been increasing since the third quarter of 2009.
While no one can predict the future, The Green Sheet did gather economic data from a range of sources reinforcing the view that this trend will continue - and possibly gain momentum.
The big picture
As a whole, the economy continues to grow at a modest pace. In February 2011, the Ceridian-UCLA Pulse of Commerce Index (PCI), a real-time measure of the flow of goods to U.S. factories, retailers and consumers, recorded its 15th straight month of year-over-year growth, despite a 1.5 percent drop from the January figure.
"The PCI performance in the first two months of this year suggests weakness in some parts of the economy," stated Ed Leamer, chief PCI economist and Director of the UCLA Anderson Forecast, in a report posted on the UCLA Anderson Forecast website. "Nevertheless, our outlook for 2011 is for continued economic recovery - we expect GDP to grow at the historically 'normal' rate of 3 percent, accompanied by a persistent level of high unemployment."
Similarly, the U.S. Department of Commerce's Bureau of Economic Analysis reported that the real gross domestic product (GDP) - the output of goods and services produced by labor and property - increased a total of 2.8 percent in 2010, up from the 2.6 percent increase recorded for 2009.
On a broader scale, The Conference Board Leading Economic Index, a composite index of indicators ranging from manufacturers' new orders to stock prices, cited an annualized growth rate of 1.6 percent for August 2010 through January 2011. (The Conference Board Inc. is a nonprofit business membership and research organization.)
According to Ken Goldstein, an economist for the organization, one way to determine the solidity and sustainability of economic recovery is through the duration (length), depth (strength) and dispersion (comprehensiveness across sectors) of the factors signaling an upturn. If all three measures are "pointing to the fact that something is developing on the positive side, that's a lot stronger than if only one is present," he said.
Business growth expected
Businesses are expressing faith in the strength of the economy by continuing to invest in growth and development. For example, venture capitalists invested $21.8 billion in early stage, high-potential companies in 2010, a 19 percent increase over 2009's investment total, according to the MoneyTree Report by PricewaterhouseCoopers LLP and the National Venture Capital Association, based on data from Thomson Reuters.
Expenditures in research and development (R&D) - another indicator of anticipated profits - remained relatively flat over the past two years, but are expected to increase during 2011.
In a survey conducted in 2010 by the Industrial Research Institute of 119 companies across all industry sectors, 53 percent of respondents said they expect an increase in their R&D budgets; only 12 percent expected a decrease.
More evidence of increased business spending comes from information released on the 2010 GDP by the BEA. The BEA's report indicates that businesses spent 15.1 percent more for equipment and software in 2010 than they spent in 2009. (Conversely, purchases for equipment and software in 2009 were down 15.3 percent from 2008.)
The chief executive officers of America's leading companies plan additional increases in employment, sales and capital expenditures during the first six months of 2011, according to the results of the Business Roundtable's fourth quarter 2010 CEO Economic Outlook Survey. (The BRT is an association of chief executive officers of U.S. companies with nearly $6 trillion in annual revenues and more than 13 million employees, combined.)
Fifty-nine percent of CEOs surveyed during the fourth quarter of last year expected to increase their capital spending, compared to 49 percent from the third quarter of 2010. Forty-five percent anticipated increasing their hiring in the fourth quarter, up from just 31 percent the previous quarter.
Unemployment fell to its lowest rate in almost two years in February 2011, to 8.9 percent, with the addition of 192,000 jobs, according to the U.S Department of Labor.
Many businesses are finding their revenues are starting to go up modestly. The New York Times reported that BEA data showed American businesses earned profits at an annual rate of $1.659 trillion in the third quarter of 2010. That is the highest figure recorded since the government began keeping track over 60 years ago, at least in nominal (not adjusted for inflation) terms, the article stated.
Among the big retailers that have recently experienced sales increases are Macy's Inc. and Home Depot U.S.A. Inc. At Macy's, sales for the fiscal fourth quarter ended Jan. 29, 2011 rose 5.4 percent to $8.3 billion, compared with the same quarter one year earlier. Same-store sales were up 4.3 percent, and sales at the corporation's Macy's and Bloomingdale's websites rose 29.1 percent.
Sales for Home Depot, for the fiscal fourth quarter ended Jan. 30, 2011, rose 3.8 percent year-over-year to $15.1 billion. Same-store sales were up 4.8 percent.
Economic activity in the manufacturing sector expanded in February 2011 for the 19th consecutive month, according to the Institute for Supply Management's manufacturing index.
Of the 18 manufacturing industries represented in the index, 14 reported growth in February.
Stock indexes also started off 2011 admirably. In a newsletter published by Legg Mason Capital Management, Senior Vice President, Portfolio Manager David E. Nelson commented: "After three down Januaries in a row in 2008, 2009 and 2010, the S&P 500 was up +2.37 percent in January 2011, posting its best opening month gain since 2006, and flashing an encouraging signal to followers of the January Barometer."
The expectation that stock index performance during January sets the tone for the rest of the year apparently carries weight with financial advisers. In a survey of 1,399 advisers conducted by Charles Schwab Corp., 56 percent classified themselves as bullish, while 10 percent saw themselves as bearish about stock market performance over the next six months. Seventy-seven percent of advisers surveyed are expecting the S&P 500 stock index to rise in the next six months, compared with 63 percent in July 2010.
"While there is still uncertainty in the markets and in various parts of the world, independent investment advisers clearly think we are turning the corner economically," said Bernie Clark, Executive Vice President and head of Schwab Advisor Services, in a statement about the survey results. (This positive outlook has been tempered somewhat by the economic and human toll being exacted by the massive earthquake and tsunami that clobbered Japan on March 11, as well as concern over rising oil prices. But neither has caused a reversal in economic progress to date.)
Meanwhile, the increase in stock portfolio values helped drive up Americans' net worth by $2.1 trillion, or 3.8 percent, to $56.8 trillion in the last three months of 2010, from the previous quarter, according to the U.S. Federal Reserve Board's Flow of Funds Accounts report.
Consumer confidence and spending
Mirroring the enthusiasm that businesses and investors are demonstrating is growing consumer confidence. Consumer confidence increased in February to its highest level in three years, according to an index maintained by The Conference Board. The index improved to 70.4 in February, from 64.8 in January. The Conference Board Consumer Confidence Index reflects consumers' perceptions concerning business and employment conditions and personal income.
This confidence carried over into consumer purchasing behavior in the retail sector. In February 2011, the U.S. Census Bureau stated that advance estimates of U.S. retail and food services sales for that month, (adjusted for seasonal variation and holiday and trading-day differences, but not for price changes) were $381.6 billion, an increase of 1 percent from the previous month, and 8.9 percent above February 2010.
Also in February, the National Retail Federation released its 2011 economic forecast, projecting retail industry sales (excluding automobiles, gas stations and restaurants) will increase 4 percent from 2010. The optimistic outlook was fueled in part by seven consecutive months of retail sales growth and better-than-expected holiday sales, according to the NRF.
Consumers aren't holding back on larger purchases, either. According to Consumer Reports, car sales for The Chrysler Group increased 17 percent in 2010, for General Motors Corp. 21 percent (for its four core brands), and for Ford Motor Co. 19 percent. The manufacturers posting the largest gains were Hyundai Motor America (24 percent) and Subaru of America Inc. (22 percent).
On the luxury spending side, jewelry sales also went up an impressive 7.7 percent from 2009 to 2010, reaching a record $63.4 billion, according to the U.S. Department of Commerce.
A drive to succeed
The Conference Board's Goldstein said empirical and anecdotal evidence suggests the economy is improving. "Whether you [examine] this in a very rigorous fashion or whether you just simply talk to Joe-the-plumber-type people, the impression is that the economy is a little better ... that the economy is starting to pick up a little momentum," he said.
Where can we expect to see areas of growth as the economy picks up speed? Goldstein believes growth in the next decade is going to be less tied to real estate and more to areas like information processing, business services and Internet services, plus the standards: leisure and retail trade. The last two, in particular, are markets where payment professionals shine.
As stated in Good Selling: Thirteen Weeks to Personal Success by Paul H. Green, founder of The Green Sheet Inc., "Resolve that you will double the amount of enthusiasm you have been putting into your work and into your life. If you carry out that resolve, you will probably double your income, and double your happiness."
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