Sunday, April 12, 2009

When Will The Economy Turn?

What direction is the economy going to take? We'll know the answer soon enough. I think we are in a critical transition period right now from an economy that has been in a free fall to one that is starting to stabilize. Earnings season has begun, and I expect the posted earnings to be bad, because as I just said, the economy has been in a free fall. If you are hoping to see good earnings as a sign that the economy has been improving, I doubt you will find it yet, as the economy is just now beginning to stabilize, so the past quarter has not been one where companies made money. Maybe next quarter, you will see improved earnings, but not this one. 

But there are two signs you should look out for. First, unemployment. If unemployment stops increasing so fast, you can take that as a great sign that the economy is turning. People will start spending more because they see that unemployment is not getting worse, and that they do not have to worry about losing their jobs. Now when I say unemployment is going to stop increasing so quickly, I do not mean we peaked at 8.5% unemployment. But I do mean, that instead of the amount of jobs we lose every month increasing, they will start decreasing. For example, lately we have seen unemployment numbers of 598,000 in January, 651,000 in February, and 663,000 in March. From now on, we will see jobs continue to be lost, but not more than 663,000 in a single month. So the rate of unemployment still has a ways higher to go, but the speed at which it increases should slow down, showing us that the economy is turning.

The next sign would be company forecasts. Transports, Oil, Tech, and Financials should be the companies you focus on because they are the ones that will see their business sharply increase as the economy begins to turn. Transports are important because in a healthy, flourishing economy, businesses are going to need to transport goods from one place to another. In a slow economy like today's, no firm can sell any goods so they are not transporting them across the country, and the transport business has seen its revenue drop significantly. If the transport industry gives a good guidance, then we can think that the economy is going to begin moving again.

Oil, is similar to Transport in that it really greases a healthy economy. A healthy economy demands oil for everything from fueling trucks, to making products. If an economy is at a standstill, oil demand falls. If oil companies increase their guidance, we will know the economy is starting to get better.

Financials are probably the most important companies to focus on. The economy simply cannot run if there is no credit. If firms can't borrow money, then they can't put in orders for large products, and then industrial companies have no one to supply their goods to, etc...  If they cannot start making large projects for future benefit, then their revenue won't increase and they will start laying off people. If financials give a strong guidance about an improvement in credit (and essentially and improvement in profits), then we know that soon enough, companies will begin to borrow money to invest it in a more productive future. Look for financials to be the first to turn, and the most important. Flowing credit will put an end to unemployment and start increasing jobs.

Lastly, tech is a high growth sector that lives off of a thriving economy. Consumers love to spend on technology because it is cool and useful. However, in a recession, that is the first place they cut down on. If tech makes a comeback, then we know that the consumer is not afraid to spend anymore, and consumer confidence is one of the most important barometers of a healthy economy. If tech gives good guidance, then consumer spending, which is 2/3 of the u.s economy, is likely to start increasing.

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