Green Sprouts Amid the Crabgrass?

Are there verifiable indications of recovery or are we doomed to another six months of painful recession?

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The answer is—yes. There are indeed solid extant indicators of the coming general economic recovery, thus the green sprouts. Before you get excited, you should know that the timing relationships from these leading indicators to when the general economic recovery begins point to a late-2009/early-2010 reversal from decline to rise.

The U.S. Industrial Production Index (which is Ecotrends’ preferred benchmark of U.S. economic activity) is indicating significant trouble for the U.S. economy in the latter half of 2009. Production on a monthly basis has fallen to the lowest level since 1947, and there is more pain to come. Even when this trend turns around in 2010, it would be unwise to plan on a robust recovery, given the likelihood of increased inflationary pressures, tax increases and our projection of increased energy costs.

Heal thyself

My company doesn’t subscribe to the thought that the United States is poised to experience a lost decade, similar to what plagued Japan in the 1990s. The social dynamics are different, the demographics are different and the world is much flatter than it was 20 years ago. Our opinion is that American capitalism still works, and that business will find a way to go back to work, hire people and buy products. In short, the economic system will “naturally” begin to heal itself of the excesses and imbalances of the last few years. “Excesses and imbalances” sound much better than the plain reality, which is that we have been on a credit binge for the last few years and now we have to deal with the hangover that comes the next morning. It may seem like the headache will never go away, but it always does.

The stock market (S&P500) has probably established a low on a monthly basis and in terms of the 1/12 rate-of-change, at least there is a 62 percent probability that lows have been established. The recovery of your portfolio is likely to be slow. We suggest that you use a rifle instead of a shotgun in your investment decisions. Pick stocks and market segments that are consistent with demographic and political trends such as infrastructure spending, medical and alternative forms of energy.

Use the next six months to plan on how you will take advantage of the recovery in 2010. Ask hard questions about your business. What are my competitive advantages and, concurrently, what are my competitor’s weaknesses? Do I have the people I will need? Are they properly trained? Is my marketing plan geared toward a more discriminating purchaser? Do I have a properly targeted advertising plan? Will I have the cash I need to implement these plans? Have I secured financing and/or my banking relationships? Do not plan on a resumption of 2008 business as usual, but rather a lower level of activity with an underlying inflationary environment.

Machinery New Orders stand at $327.6 billion, down 6.7 percent from this time last year. Look for the year as a whole to come in 27.5 percent below 2008. The rate of decline is expected to moderate in 2010 with mild recovery taking hold in the latter half of the year. This would be the time to de-emphasize services in anticipation of diminishing margins and weed out inferior products. Make sure that the products you keep bring a return that justifies the resources they require.

Alan Beaulieu, alan@ecotrends.org, is Senior Analyst, an economist and a Principal with the Institute for Trend Research, in Concord, N.H. He invites your comments. Visit ecotrends.org and subscribe to monthly updates on EcoTrends.

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