Biz Beat: The road to recovery
It's the question on everyone's minds: When will the economy recover? Recently, we've seen some positive news, but the latest unemployment numbers to be released Friday are expected to paint a grim picture.
First, to the good. Stocks have steady risen after bottoming out March 9. The Dow is up 40 percent off its March lows to levels we haven't seen in nine months. Stocks have been helped by some positive earnings reports from major companies. Goldman Sachs blew away expected earnings, while still-struggling Ford Motor Co. beat estimates, too. Wall Street has largely ignored the bad earnings at companies such as Microsoft, leading me to believe investors are becoming more optimistic about the future.
For those of you who didn't lose faith in the market during its freefall last year, you've been rewarded. Others have learned the hard way never to buy high and sell low. Certainly, the first quarter of 2009 was a great time to jump into the market. October 2007 (when the Dow hit a record-high 14,000) was not. But most of America entered too late to reap real gains, exited too late to avoid losses, and was too impatient to wait for recovery.
Moving forward, many analysts have said the market might be a bit overvalued. Other indicators - especially employment - haven't kept pace with stocks. That's why I expect to see a slight market correction in the third quarter of 2009 before climbing again toward the end of the year. Indicators point for the economic recovery to pick up pace then.
While the markets have shown the most positive signs, other indicators have turned upward recently, too. New home sales spiked 11 percent in June, rising for the third straight month. And home prices were also up, although they were 17 percent below last year's prices. It could take many months of gains to reverse the slide. If you're looking to purchase a new home, the time is right - prices may have bottomed, sellers are getting desperate, and the federal government's $8,000 tax credit for first-time homebuyers is on the table.
Gross domestic product, the best indicator of the overall economy, shrunk by a better-than-expected 1 percent in the second quarter. That's a big improvement on a 6 percent drop in the final quarter of 2008 and a 5 percent drop in the first quarter of 2009. Many economists expect the GDP to swing slightly into the black in the third quarter before picking up steam late in the year.
But there's plenty of bad news out there, too. Consumer confidence is still shaky. Some economists are now talking about an "U-shaped," jobless recovery, meaning stocks recover but unemployment remains high. If that happens, demand for goods and services will lag, keeping prices low and inventories high. Companies won't meet profit expectations and won't create new jobs. It's a cyclical pattern.
Other economists are concerned about a "V-shaped" recovery. In this model, the enormous amount of cash the federal government has plunged into the market will lead a rapid recovery, but also a surge in inflation. Because this would mean our money is worth less (and, since we've just experienced the worst recession in decades, we don't have much money to start with), growth slows.
I lean more toward a jobless recovery. While inflation naturally occurs during a recovery, Americans are still paying off debt, not spending. Our savings rate has spiked, good for the long run, bad as a short-term stimulative measure. We were saving less than 1 percent of our earnings; that number is now north of 5 percent. With demand remaining low because people are still unemployed and not free-spending, I expect the recovery to be slow. Thankfully, though, it appears that we've moved past the worst of this economic storm.