The Recovery…Really!

Now is the time to shrug off the hang-onto-the-cash mentality of recession and start spending.

One lesson we have learned as 2009 ended and 2010 began is that “hope is not a strategy.” The residual effects of the deep recession, combined with uncertainty about the prospects of a sustained rising trend, are very evident. The concerns are fueled by high national unemployment, a disturbing national debt of $12.3 trillion, tight lending conditions, the certainty of higher taxes and inflation ahead and pending legislation that is almost certain to increase the cost of doing business in America. Sometimes it is hard not to be depressed.

Depression is a state of being. Here is what we are seeing. We are seeing upside leading indicator activity for 2010 in the Money Supply, the US Leading Indicator, the Purchasing Managers Index and Housing Starts. Retail Sales is also moving higher off recent historic lows. The US Industrial Production 12/12 rate-of-change has turned the corner, on target with our forecast of ten months ago. Some New Orders series are also turning up as well. Not surprising, Corporate Bond Prices has turned down, an indication that interest rates will be heading up late in 2010. Taken together, these trends confirm that the United States economy will continue to recover in 2010.

External economic indicators are not all that we can point to either. Most companies, including hopefully yours, have survived the worst recession in 60 years and positioned themselves to be profitable at much lower volumes. This is a must-you must be profitable at this level of activity if you are going to be profitable in the coming year. By now you have hopefully lowered costs, reduced prices, slimmed margins, sold off inventory and revamped expectations. Many companies are poised to benefit from improving conditions in 2010 and 2011.

It is important to know that the recovery is real and sustainable, because that knowledge will govern your actions. Now is the time to shrug off the closefisted hang-onto-the-cash mentality of recession and start spending in anticipation of improving conditions in 2010 and 2011 in the United States, Southeast Asia and Europe.

The countries of the European Union recently turned the corner, and Industrial Production is moving higher. Industrial Production in the BRIC nations ( Brazil, Russia, India and China) has all shown at least 3/12 trend reversals and can be considered well on the way to recovery. Trade protectionism, while still problematic, has been kept to a minimum in the current global recession, and this will significantly benefit the BRIC nations. Economic growth in these countries hinges on a thriving international trade scene, and these nations are poised to grow rapidly in the next several years if they can maintain a stable political and economic environment domestically.

Opportunity in Real Estate
There is also a great opportunity presented to us as a result of this recession. Low real estate prices, along with very low interest rates, provide a great opportunity to buy an asset that will benefit from the rising inflation we expect to see in the future. Put enough money into the purchase, and the monthly rental income should provide for a positive cash flow that you will be enjoying for many years. For those who don’t like to own real estate, this is also a great time to buy capital equipment that will improve efficiencies, contain costs and improve cash flow.

Some Specifics
Medical Equipment and Supplies Production is unfazed by all the hoopla surrounding the economy at large and the media circus surrounding health care reform. The industry rate of expansion has moved lower ever so slowly since mid-2006, but it is still posting a year-over-year growth rate of 3.1 percent. Our forecast sees this as a growth industry and worth investing resources in to capture a larger market share.

There is little relief yet for General Purpose Equipment producers. This market remains depressed with Production in 2009 coming in 20.7 percent below 2008. Annual Production has fallen 23.8 percent from the February 2008 high, making this the steepest decline in the 36-year data history. Industry participants are no doubt waiting for further demand-side signals in the Total Industry Capacity Utilization Rate. Take heart, there are signs pointing to a transition to recovery in the near term. Expect a slow improvement in the latter half of the year.

Personal Consumption Expenditures for Hand Tools are 6.9 percent below this time last year, but things are beginning to look up. The rates-of-change are looking better, along with the overall improvement in Retail Sales. The consumer is slowly coming back to life, and that bodes well for GAWDA members in the coming quarters.

A Word of Caution
T he S&P 500 Monthly Index is up 46.1 percent from the 2009 low and 30.0 percent higher than one year ago. There is a tendency to think of the January pullback of 3.7 percent as a short-term correction and nothing more than that. You may even be thinking that it is a great time to pile back into the equities market. Be careful. We think you should be exercising caution regarding the market’s direction for at least the next several quarters. We saw similar S&P 500 ascents and subsequent stalls in the market trends following the mid-1970s and early 1980s.

Gases and Welding Distributors Association
Alan Beaulieu Meet the Author
Alan Beaulieu is an economist with the Institute for Trend Research located in Concord, New Hampshire, and on the Web at