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0 Aug 5 2010 @ 10:58am by Matt Smith in Capital Markets, Economy, risk management

The Sunny Side of the Street

I am a sucker for Satchmo, so presently we are going to take a walk on the sunny side of the street. Mixed economic data has made it easy to fret about the validity of a global recovery since we exited ‘the great recession’ last year, even though market behavior has indicated there is nothing to worry about (Treasury Secretary Tim Geithner says there still isn’t).

However, now that skepticism is growing that we may double dip (go to Google insights here to see its growing popularity), I find the contrarian in me wanting to look out in the great wide open to find some indicators that illustrate a positive picture. And trust me, it’s not that easy to do. However, here is what you can find if you direct your feet…to the sunny side of the street.

First up, a key barometer of economic activity: manufacturing. After a synchronized swan dive by the manufacturing sector across the world in 2008, activity has rebounded just as stomach-wrenchingly swiftly, like a sudden bout of turbulence. The chart below shows Purchasing Managers Indices for the manufacturing sector across time for major economic regions. It illustrates that manufacturing (the lion’s share of industrial production) across the globe has shown expansion for at least ten consecutive months ( a reading above 50 on the PMI indicates expanding economic activity). And although recent months have shown a slowing across the sector, we remain in positive terrain:

This next data point involves Warren Buffett’s favorite indicator – US weekly rail traffic. The Sage of Omaha follows this with fervor, as railcars are considered the lifeblood of the American economy, shipping goods across the country. The data illustrate that although rail traffic may not be showing stellar improvement (while also being well below pre-recessionary levels), it shows a steady pace of improvement year-over-year, a trend that a number of other economic indicators are illustrating:

We go no less random as we head to our final indicator – the US savings rate. The below chart illustrates how savings rates have bottomed out in the US in the last five years, as the over-leveraged US consumer has realized (or been forced to realize through tighter credit constraints) the need to borrow less and save more. But this rise in the savings rate is not necessarily a cause for concern – China’s savings rate of 38% certainly indicates an economy can grow rapidly even while saving significantly. So while a higher savings rate may mean somewhat less consumer spending, it also provides the fuel for investments in new productive assets in our economy, the ultimate long-term source of growth:

So there we have it; some reasons to be cheerful, 1-2-3. Sometimes it is easy to get swept along in a sea change of market sentiment, and it is good to look at the opposing view, regardless of if you buy into it or not. But if this has left you feeling rather fretful, just remember you can always put on some Satchmo, kick back, relax, and be swept away elsewhere.

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