A few ideas and observations have been bouncing around in my head concerning the U.S. economy in relation to the dismal housing market and possible future results in the stock market. The economy is technically not in recession, but a large number of Americans believe or feel that recessionary conditions exist. A recent Fox News poll discovered 83% of Americans think the country is still in recession. An American Research Group poll showed only 33% of the population think the economy is not in a recession while 36% think there continues to be a recession and 31% cannot tell. In the same survey 49% rate the economy excellent, very good, or good and 50% selected bad, very bad, or terrible. My own guess is two out of three do not understand what a recession means.
I think there are several reasons why the economy feels like a recession in contrast to the government economic data which shows a slow growth situation.
The bulk of the benefits of growth seem to be going to large corporations. Big companies, in most cases, continue to grow revenues and profits. The stock market has moved smartly upward over the last six months as corporate profits come in better than the expectations.
The jobs market remains very sluggish. A major reason is that those large companies making those increasing profits are not adding employees. I have read the financials on hundreds of companies over the last year and almost every one is using extra cash flow to buy back shares. The large U.S. corporations are not interested in adding lots of employees to grow their businesses.
The housing market remains in an extended funk. Each month the reports for new and existing homes show sales levels at fractions of historical rates. Home prices are so ugly that a smaller than previous year-over-year decline is view as a positive factor. According to the Case-Schiller index, home prices are back down to 2003 levels. Any price gains over the last full decade have evaporated.
The three areas of economic problems all feed into each other: Housing will not get better until jobs get better and the economy heats up to help home prices. Jobs won't get better until the new home market and the economy outside of the S&P 500 starts to do better. The economy won't show much improvement until the public feels better about jobs and their home values.
For a while in March and April, the economic data looked better than a year earlier, but those numbers may have been due to the mild winter weather. Over the last several weeks the data is really starting to look anemic. As the Boston Globe put it, there is a "Long slog ahead for economy".
Over the next few months it is very likely that the economy will slip back towards zero or negative growth. Instead of the Great Recession, this one will be more like a slow, two-sided recession. Big corporations will not be much affected but the majority of individuals, small businesses and the housing market will continue to feel the pain.
A solution to the slow/no growth problem does not seem to be in the cards. I have discussed in the past the need for a radical change towards the housing and mortgage problems. On the business side, an extreme simplification of the corporate tax system with a long-term commitment to not mess with taxes would help the employment situation. Since employment lags real economic recovery by up to a year and it is very unlikely any significant action will be taken until after the November elections, the current economic malaise in the U.S. could linger into early 2014.
For investors, stick with companies which can generate profits through slower economic conditions - companies like Apple (AAPL), McDonald's (MCD), Coca Cola (KO) and IBM (IBM). Do not be surprised if we see a late summer early fall bear market as the reality of a slowing economy is realized by the market.