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"Financial advisor, Patrick Lyons, gives an update on the economy"
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September 2009 Economic Recap US
The Federal Reserve has upgraded its view of the economy signaling the recovery has started. It now believes the downturn has ended and we are starting to see growth, but they are tempering their enthusiasm by saying it is at a slow pace.
The housing market turned in mixed numbers for August with new home sales being up 0.7%, while existing home sales declined by 2.7%. It doesn’t appear the housing market has retrenched, but the growth over the past four months has slowed. It’s possible to get another big increase in home sales as the December 1 deadline approaches with homebuyers rushing to take advantage of the $8,000 tax credit.
Job losses are easing, but the employment picture is still cloudy as few organizations outside the Federal government are hiring. The unemployment rate rose to 9.8% in the most recent report with the economy losing 263,000 jobs. It’s possible that as the stimulus works its way into the economy in the coming months there will be an uptick in demand which should spur hiring in 2010. In some regions around the country the jobless rate exceeds 10%, particularly in rural areas. Auto sales took a drop after the “cash for clunkers” program ended. So although there are some early signs the economy is improving with the Index of Leading Indicators and the manufacturing sector increasing the most of the year, the recovery could be on shaky ground if the employment picture doesn’t improve soon.
South American countries are poised to experience solid growth coming out of this global recession. Brazil is rich in agriculture and energy related commodities which are in high demand from countries like the US, China and India. Additionally, the country will be hosting the 2014 World Cup and 2016 Summer Olympic Games which is likely to drive investments in the region, which some economists expect to add an additional 3% - 4% to GDP growth in the coming years.
Outside of South America there continues to be growth in the Pacific Rim. The International Monetary Fund expects Asia to grow 7% next year with China leading the way with 9% growth, which is significantly more than the 1.5% estimate for the US. China has benefitted from a stimulus program that has spurred domestic spending that has helped offset the weakness the country has experienced due to reduced spending from its trading partners in the US and Europe.
The stock market has had a strong run since March, rising over 50% from the lows. The rally is due for a pause at this point. Despite the massive cash sitting on the sidelines (still over $3.4 trillion) the inflows to stock funds is $15 billion, while bond funds received over $200 billion during the first eight months of the year according to Morningstar. This trend is likely to continue until we get signs that the economy is growing at which point bonds are likely to lose ground and decouple from stocks. Inflation as measured by the Consumer Price Index is down 1.5% over the last twelve months. This coupled with the fact that many areas of the economy are still weak suggests the Federal Reserve may maintain the current level of interest rates well into 2010.
The outlook for positive growth next year bodes well for the stock markets around the world. Corporate earnings are already showing signs of improvement with the companies in the S&P 500 expected to report a 9% decline in earnings for the 3rd quarter of 2009 and deliver positive growth in the 4th quarter. Many large companies are flush with cash and have started going on shopping sprees buying smaller competitors. This can possibly re-ignite the stock market rally into the 4th quarter and cause more cash from the sidelines to enter the market.
Patrick Lyons, the President of Lyons Den Capital, has worked for more than a decade as an investment professional. His expertise ranges from managing institutional and personal portfolios to analyzing various economic sectors of the stock market.
Check out Patrick Lyons latest book Map Your Financial Freedom: Charting a Course Through Adulthood and Retirement. It’s available through www.Lyonsdencapital.com as well as online retailers such as Amazon and Barnes & Noble for $14.95.