While many pundits are talking about recessionary conditions – we would like to point out that the actual environment is much better than this, and in many regards, running at about the same pace now as Q1. We acknowledge that GDP growth has disappointed this year, and come in lower than bullish forecasts from Wall Street banks like Goldman Sachs. Much of the delta in GDP comes from a push-out in the housing recovery as well as a slowdown in government spending. On the consumption and private sector side, things are hanging in. Some rays of light:
1) Retail Sales are strong – the weekly sales surveys from Redbook and ICSC are running at the high growth rates of the year (exhibiting 3-4% growth).
2) Retail company earnings are healthy – we have received great Q2 results with strong sales and well controlled inventories from: Macy’s, Kohl’s, Nordstrom, Wal-Mart, Target, Coach, and Home Depot. This is not the stuff of recessions.
3) Gasoline prices are down from the highs – the Energy Information Administration reports a national price of $3.60 in the recent week, down from a peak of $3.97 in May (down almost 10%).
4) Interest rates are at new lows in the mortgage and consumer credit market – not all can take advantage but this does help some.
5) Corporate credit has been abundant at lower costs
6) Unemployment claims have shown the best 3-week streak since late March – the job market is more stable than many think.
7) The US Dollar has sold-off which supports our exports and multi-national profit outlook.
In short, there are many issues driving “stall speed” growth (these have been well publicized) related to implementing fiscal austerity, household sector deleveraging, and ongoing secular issues with creating jobs in our country. But despite all of the above, we are not right on the cusp of recession. That is why we have taken a constructive view of the stock market during the recent pull-back which looks to us to have priced in too high a probability of recession. All the market needs to rally is some evidence that a recession is not lurking right around the corner.