On Tuesday, July 28, 2009, Lenny Lipari, Craig Landry, and David Brady of Action Specialties, LLC attended a presentation on the state of the U.S. economy hosted by DSF Wealth Management, LLC at the City Club in Lafayette. The guest speaker was Jim Kochan, an economist by trade and is a Senior Investment Strategist with Wells Fargo. DSF Wealth Management also hosted Mr. Kochan last December.
Mr. Kochan started with the old saying that if you put 4 economists in a room, you would get 5 opinions, so his opinion should be taken in light of that. He said that while the economy is still not good, there are signs that we are beginning the recovery. When compared to December when he was here last, the financial markets have shown vast improvement. Many banks have repaid or are repaying their TARP funds. The spread between 10 year Treasury yields and corporate and municipal bonds have returned to normal levels. The stock market has shown good growth since the March 2009 lows, which he believes was the bottom. Some economists are expecting another crash or at least a mini crash. However, he said that even though some people have gotten back into the market, there is still much cash on the sidelines waiting to get back in. The market has been able to grow since March without this cash, and the infusion of this cash into the market will only contribute to continued growth.
Unemployment still remains high and will continue to climb, but unemployment is a lagging economic indicator, and always follows behind the economy. Housing sales and factory orders are better current measures of the economy, which both of these measures are beginning to show slight improvement. Historically, when the economy drops as sharply as it has, we tend to come out of the recession just as quick. He believes that will not be the case this time and that we will have a longer recovery. While housing and factory orders are showing improvement they haven’t been sharp increases. The housing recovery does vary by region. It remains weak in California and the Las Vegas area. These areas took a bigger hit than other areas of the country because real estate values were so much higher in those areas.
Inventory levels have dropped to extremely low levels, and as such he expects production to increase in the third quarter because current inventory levels cannot support even a small increase in demand. Companies have done a good job in reducing costs, so that any increase in revenues no matter how small will go directly to improving bottom line profits. He said the GDP numbers that would be released later in the week would be another good indicator on if we are truly coming out of the recession. The GDP numbers were released on Friday and showed an annual decline of 1%. Even though the economy continued to show a decline, it was a marked improvement over the 1st quarter decline of 6.4%, and less than the 1.5% decline that was projected.
One danger to be concerned about is the risk of inflation as we come out of the recession. However, it is his opinion that this risk is no longer as great as it once was because of the continuing expansion of the global economy. Foreign competition and cheap labor costs should hold prices in check.
It is Mr. Kochan’s opinion that we will begin to come out of the recession in the 3rd and 4th quarters of this year. He expects unemployment to continue to rise until about January of next year, before showing improvement. He said many economists disagree with his cautiously optimistic outlook. However, just six months ago every economist was in agreement over how bad the economy was. The fact that now there is disagreement over how to interpret these signs of improvement is another indication that things are improving because they are no longer unanimous in their opinions of the economy.
