Date: February 14, 2012

Top 9 Tips for the Successful Investor in 2012: Tip #5

5 – Look for the U.S. economy to continue to slog along

When economies emerge from recession, Gross Domestic Product (GDP) tends to accelerate very quickly and in steep fashion as consumers who have held off purchases begin to buy and companies who became lean and mean during the cleansing are not left with much inventory. That’s in “normal” times.

What we experienced in 2008 and 2009 was the bursting of a credit bubble and subsequent deleveraging (reducing debt). Recoveries from credit busts are very different from that of “normal” recessions which are usually caused by corporations becoming too fat and bloated. As we witnessed in the 1930s, it takes time and patience for the economy, corporations and individuals to return to a sense of normalcy.

Let’s not forget that it took decades to leverage up (borrow) to the point of collapse and history suggests that it will take about one third as long to fully deleverage and right the ship. Once the U.S. economy began to stabilize in 2009, it was in for a long period of sloggy growth, hampered by the effects of the credit bubble bursting. GDP growth should see periods where the economy teeters on recession along with times where it seems like it’s all systems go. It would not be unexpected to see growth rates range from -1% to +3.0%.

During this recovery, unemployment is expected to remain stubbornly high with muted progress as you can see from the solid red line on the graph below. It is going to take time, patience and some more pain before the employment picture really brightens this decade.

One of the big surprises is that while the economy has technically recovered what it lost, it is doing so with at least 6.6 million fewer jobs. And that’s why it still feels so difficult for most. The chart below perfectly depicts this.

Another item that should not be ignored is that corporations are making record profits with their smaller workforce and wages have not grown at all. It may be good news for Corporate America, but not so for workers.

Corporate Profits versus GDP

Two of the more outside the box indicators of economic activity can be found below. The first is an index of architectural billings. If architects are billing well, that usually translates into increased economic activity 6-9 months down the road, similar to the effects of Federal Reserve monetary policy. Over the past two years, you can see that billings have been plus or minus 10% of the neutral 50 line, another piece that supports a sloggy economy. This behavior should continue.

Architectural Billings

The next chart shows how restaurants are performing, another indicator of the average family’s health. Similar to the architecture billings, activity fell off a cliff in 2008, recovered sharply and has been in a range for almost two years.

Restaurant Index

The previous two charts, along with others before that, support an economy that will quietly trudge along for some time with subpar growth and occasional bouts of weakness as the world digests the aftermath of the credit crisis. There is a light at the end of the tunnel this decade from which the opportunity exists for a 20-30 year period of economic and market peace and prosperity. Just have patience!


Paul Schatz, President, Heritage Capital