The next milestones

OK, so the heart of the 2nd quarter earnings season is past us now. The truly important companies, in terms of gauging a recovery, have reported: technology, banking and autos. The results were better than economists and analysts had expected. The stock market has rallied and is actually now up for 2009. So what’s next?

We should be looking for:

• Increases in consumer confidence and spending. As silly as it is, most consumers think that the stock market is a weighing machine for the strength of the economy. Because the stock market has increased in value, this should increase consumer confidence and spending. We saw this in the Spring. As I had predicted (hold the applause, thank you, thank you) the stock market bottomed in March and then soared in April and May. Consumer confidence and spending then increased. The appreciation of the market was warranted in my opinion because a Depression was being priced into the stock markets in the midst of a tough, but nonetheless ordinary, recession.

But then investors halted their inflows into the market and stock prices leveled off. Then confidence fell. Then the stock market collapsed in June.

So hopefully we get every economic segment to be in accord. We get consumer confidence and spending up and investor dollars flowing. I am not wanting a huge, screaming appreciation in the stock market. No. What I would love to see is people tepidly returning to the stock market. Caution in investing is a good thing.

• We should also be on the lookout for increases in GDP. It seems as if the recession has bottomed. That should result in GDP growth again. One factor that will help is that according to the GDP data collectors, the country has been in recession for over a year. That means that the comparisons get easier. In other words, the GDP growth that the statistics will report won’t be growth on top of the maximum level that GDP ever attained. Nope, GDP is compared to the prior year’s GDP. So since GDP shrank a year ago, it is an easy number to beat. While this just sounds like a statistical artifact, GDP growing will be the piece of good news that everyone is looking for. This should provide uplift in consumer and business confidence. That should lead to a relaxing of the United States’ collective sphincter and businesses will start hiring again.

I imagine that if GDP didn’t grow in July, that it will be close to being positive. That should set us up for GDP growth in the 3rd quarter.

• We also should be looking for an increase in lending on the part of banks and other financial institutions. See the previous post for the details. I would imagine that we will see growth in lending in the 3rd quarter.
• Stabilization of unemployment figures. We are already getting strong hints that this is happening. The two most recent unemployment figures have shown an expansion in employment. However, the analysts calculating the figures have cautioned that the auto industry has not engaged in its usual summer layoffs so the numbers may be skewed. But there have been no announcements from the auto companies of seasonal layoffs. So I am guessing that this number will show increases going forward. Whew!
• We also should be paying attention to the regulatory landscape. All of us should want an oversight improvement. This one appears to be stalling unfortunately.
• Pay attention to anecdotal stories of frat boy behavior on Wall Street or of ridiculous executive pay packages. Right now these a**holes are hunkering down low and hoping that the firestorm over their jackass pay passes them by. However, I don’t sense a philosophical rethink on the part of companies. This is unfortunate, because as I said last fall, executive pay packages are one of the big reasons that this whole economic crisis happened in the first place.

How? Because the rewards are so large it leads to execs taking unnecessary risks. Also, the performance periods are almost always over the course of a single year. So it encourages “home run” thinking, instead of singles and doubles thinking. Lastly, most of the executive pay packages do not take away money if the executives fail – that is, they can only breakeven or make a fortune. Disgusting.

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Feel free to watch for these milestones along with me. But know that I will be writing about these issues going forward.

Big smile sent out to everyone!

Jason