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What Happens Next for the Economy

We have entered into the broad U-shaped recovery that we talked about in the last issue.

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The U.S. economy is showing some improvement as measured by Gross Domestic Product (GDP) and in U.S. Industrial Production. The improvement is very encouraging and consistent with our forecast. There are more leading indicator signals that the recovery is sustainable; however, don’t forget that it is also likely to be very mild over the next few quarters.

The first item on your agenda should be to make sure you are profitable at today’s level of activity. If your profitability is dependent upon a return to 2007/early 2008 levels of activity, you have a problem going forward. For many of us, the economy will not be that generous for a long time. Instead, we need to be sure that we have found a way to be profitable at today’s reduced levels of activity. We strongly suggest that you plan on leveraging your 2010 profits into missionary efforts to enable the business to sell boldly into new markets or to boldly sell new products/services that your customers want.

Look to exports as the second item on your agenda. The U.S. Dollar is weakening and we expect that the general trend will continue. The onset of a global recovery, in conjunction with a weaker dollar, means that there are export opportunities for many firms. Even if exports are not a viable option for your firm, perhaps you can sell to companies that are well placed to take advantage of the export activity. Concurrently, a weaker dollar might help protect some domestic manufacturers and distributors from foreign incursion. The weakening dollar might give you the cost advantage you have been looking for.

Third on the agenda, notice that Nondefense Capital Goods New Orders (excluding aircraft) is providing some compelling evidence that business-to-business activity is picking up. The 3/12 (quarterly) rate-of-change, although still running deeply below zero, has upward passed the 12/12 (annual) this month. We have been waiting for this signal to confirm that a fundamental recovery trend is ahead.
The worries about Commercial Real Estate will fade into the rearview mirror as we traverse 2010. This constitutes the fourth event to look for. There is a lot of concern that a meltdown in the Commercial Real Estate market will do to the U.S. economy what housing did—cause another crash. We are anticipating a fair amount of pain in Commercial Real Estate for property owners, realtors and bankers, but we are not anticipating that this will trigger “part two” of the Great Recession. Buying property at the trough is a great way to create wealth on the upside of the business cycle.

Tight credit

Another event to look for, and fifth on our list here, is an improvement in Commercial & Industrial Loan activity. Commercial & Industrial Loan activity is presently 11 percent below the year-earlier level (1/12 rate-of-change basis). This is the worst year-over-year percentage in the post WWII history and accounts for the difficulties experienced by those trying to get credit. Unfortunately, the situation is not likely to get appreciably better any time soon.

Historically, Commercial & Industrial Loans’ 1/12 will stay below zero for at least a year after the GDP data starts to rise. If you can remember the early 1990s difficulties in the construction industry, one of the reasons the pain lasted so long was that it took three years before the Commercial & Industrial Loans 1/12 broke upward through zero. Don’t look for even the “new norm” for lending activity to be there for us until late 2010 at the earliest.

Alan Beaulieu,, is President of the Institute for Trend Research (,
in Boscawen, N.H.

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