The economy is looking increasingly dicey for 2010.
Oh, things are OK now. The most recent numbers are, in fact, reassuring. The United States seems to be on track for something like 3% economic growth in the fourth quarter. That would be a slight acceleration from the 2.8% growth (as revised) in the third quarter. And it would put the economy on track for the kind of decent, but not great, recovery in 2010 that most investors and economists are expecting.
But recent numbers suggest that instead of accelerating off that fourth-quarter growth, the economy might be headed for a slowdown in 2010. Not all the way back to negative numbers but definitely a deceleration at a time when just about every stock is priced for acceleration in revenue and earnings.
There's nothing certain in these numbers. And I'm sure some of you will add them up differently. But let me give you the evidence that growth, rather than picking up, is going to start sputtering in 2010.
So far the numbers look pretty good for the fourth quarter.
Manufacturing continues to expand, according to the Institute for Supply Management survey. Yes, manufacturing activity dipped to a reading of 53.6 in November. That was lower than economists' consensus forecast of 55 and down from the 55.7 mark for October. But anything above 50 shows that the manufacturing sector is expanding. November marked the fourth consecutive month the index came in above 50.
November auto industry sales also strengthened, climbing to an annual rate of 11 million units in the United States. That's up from an annual rate of 10.5 million in October and 9.2 million in September. On Nov. 5, I wrote, "October is the first month since December 2008 to see the annualized rate of sales top 10 million units -- without the push of a government subsidy."
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There were even promising signs out of the residential-real-estate sector. Released Dec. 1, the National Association of Realtors' October index of pending home sales was up 3.7% from October 2008. The index measures the number of new signed contracts for purchases.
If the data look that good for November, why am I worried about 2010? Three reasons:
Worry No. 1: No steam in the stimulus
Anecdotal evidence -- which is often less reliable than official surveys but runs ahead of the official surveys -- shows signs that the economic stimulus from last February is (a) wearing off sooner than expected in some sectors of the economy and (b) was indeed, as some of us worried at the time, too small to stem the rise in unemployment.In the construction industry, for example, anecdotal evidence gathered by The Wall Street Journal strongly suggests that highway-construction companies have just about completed the small projects funded by the February stimulus package. Even with the stimulus work, unemployment in the construction industry had climbed to 19.1% in October from 10.7% in October 2008. In the transportation and material-moving sector, unemployment stood at 11.6% in October, up from 7.9% in October 2008.
The stimulus bill provided only $28 billion (out of $787 billion) for highway construction. And while stimulus money for bigger projects is still working its way into the economy, that $28 billion was spent largely on smaller, "shovel-ready" work that has just about been completed.
A recent survey by the Associated General Contractors of America indicated that 44% of contractors expect to lay off additional workers because of economic conditions.
The hope was that the stimulus package would be enough to get the economy back on a self-sustaining growth path. That hasn't happened yet. At least not in this sector.
Worry No. 2: A lack of confidence
Deeper analysis of some of the positive data from November reveals just how hesitant the recovery is.Take a closer look at the manufacturing survey, for example. There's no sign yet that manufacturers are willing to bet on the economic recovery and build products before they have orders. An analysis by Briefing.com showed production falling slightly, even as manufacturing continued to expand, in response to a drop in new orders in October. Orders picked up again in November, but the production numbers didn't. I'd expect to see the production numbers climb again in December in response to that increase in orders.
This manufacturing to orders is also reflected in inventory numbers that show that no one is willing to build inventories in anticipation of future orders and sales. When orders fall, manufacturers cut production rather than keeping machines running and building inventory.
While it is a big positive that manufacturing is expanding, these numbers show that confidence is still extremely fragile.
