The Homeless Jobless Recovery

by Wayne Ferbert on July 8th, 2013

A recovery is a recovery. If our economy is growing, we all agree that is a recovery – especially after the depths we plumbed in 2009-2011. But not all recoveries are made the same – despite what a lot of economists will tell you.
 
Our economy has been growing slowly – but at least it is growing. The GDP growth has been around 2% annually – give or take a little. Growth is growth. A positive number is the key here.
 
Economists will tell you that 2% growth is not a robust recovery - not even close. It is more of a ‘little “r” recovery’ versus a ‘big “R” Recovery’. A big “R” Recovery would be closer to 4% annual GDP growth. We have had many recoveries with 4%+ GDP growth – so we know it can be done. But this recovery just does not look poised to approach that territory.
 
It makes me wonder why? Economists will tell you that EVERY recovery we have ever had after a recession for the last 50 years was driven, in part at least, by a recovery in the home building sector. The real estate asset class is still the largest in this country and as new homes are built, many new jobs are created.
 
But this is the first recession to be caused by a bubble in the value of homes – so the recovery in the home builders has not been that substantial. Home prices have finally started to recover in the last 12 months – but are still well off the highs driven by the bubble. And home builder profits are a fraction of what they were in the peak of 2007.
 
Rising interest rates will put price pressure on the value of homes – which won’t help that industry either. The net/net here: the home building industry is not poised to help propel this economy from a 2% GDP growth story to a 4% growth story.
 
Now, what about the jobless rate? Every recovery has naturally come with an improvement in the nation’s employment situation. This makes sense: as the economy contracts, companies lay off workers. When the economy expands, they hire new workers.
 
So far, in this recovery, people are starting to get excited about the ramp we have been on with new hiring. Last week’s jobs number shows an average of 200,000 new jobs every month in 2013. That is better than the average in 2012 of around 130,000 new jobs per month.
 
But we need to remind ourselves: the 200k new jobs per month level is the level we need just to keep pace with population growth in the United States. So, we are two years in to a ‘recovery’ and we only now have reached a level to accommodate our own population growth with new jobs.
 
A good portion of the challenge has been how efficient Corporate America has gotten at (a) controlling employment levels thru changing demands; and (b) creating efficiencies that eliminate jobs thru automation.
 
The new reality is that firms can grow earnings with fewer employees – and more computers and machinery. The current earnings outlook for the S&P500 proves it. There is plenty of earnings power to justify a market level near the current levels. The market still only trades at 15x earnings – and that assumes a very modest earnings outlook for the coming quarter of less than 1% growth over the same quarter last year.
 
It begs the question: will our recovery continue to be ‘jobless’ and ‘homeless’? The answer is: it probably can. We can probably continue to coast along with very low growth while the home builders limp along and job growth just looks average. Just ask Japan – they have been in that rut for a decade now.
 
But what will that mean for the markets? Corporate earnings can probably out-pace GDP growth by a little – but not a lot. But with current multiples at just 15X, it means this market is not at all over-valued. It just isn’t under-valued either.
 
It probably means a very range-bound market for the next 3-6 months – around 6% upside is possible – and 6% downside is possible. Unless … there is some sort of un-expected market catalyst in either direction.
 
Possible catalysts up: Above average earnings season, Economic indicators improve substantially
 
Possible catalysts down: Civil unrest around the globe, Fed accelerates the Taper program

The challenge as an investor that wants to be hedged: 2% GDP growth does not leave a lot of margin for error. The economy could swing to negative growth if the wrong industries start to under-perform - or macro-economic trends tend to drive companies to re-trench. Be on the look out for those signs. Make sure you are hedged in the meantime.



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