Economic growth hit 5.7% in the last quarter of ’09. We should be hitting a rebound at this point in the cycle, but Wall Street is still in the midst of a losing streak. What gives?
First, it is always dangerous to assess the economic scene by a short term move in the stock market; there are just too many factors affecting the market. But there are other reasons for caution.
Part of the pickup could be a ‘dead cat bounce.’ This could be that inventory levels have been depleted so low that businesses have no choice but to buy inventory in order to keep the doors open. In the metal and some commodity businesses an uptick in prices had many scrambling to get inventory in before the price increase.
But if backorders are not increasing and end users are not buying more, this bounce will be temporary.
Some projects that had been put on hold during the initial economic shock are moving forward, especially in businesses such as electric utilities that must keep pace with maintenance and demand and do not have problems getting credit or still showing a profit.
You may have put off replacing you old car, but if you still drive you will eventually need a new car, or at least new tires for your old car.
If we can grow 5.7% with record unemployment, what does this say about business demand for new employees? Employers who see no strong end user demand will keep employment lean, and will shun capital investment.
Inventory pickup is often the first sign of a recovery, but that assumes that the end user demand is there to justify it. Housing demand and employment should soon follow. If it doesn’t this recovery will flatten out soon.