I continue to believe that to this point the economy is experiencing what I am terming 'pocket recessions' while the overall economy is still exhibiting slow positive growth which the recent GDP report has confirmed. These pocket recessions are in some cases very severe especially in areas such as housing and residential construction along with specialty lending firms. I've also read through several earnings reports and transcripts of calls and have noticed a fairly common phenomenon that Florida and to a lesser degree California are struggling while the rest of the states are behaving much better thus far. So what has saved us from a deep recession thus far?
In my opinion, a couple of things: 1) Exports - Just take a look at the earnings results from several of the multinational companies along with even some smaller companies and you will see much faster growth in the first quarter in overseas markets than domestically. Of course, one of the largest reasons is the weak dollar (although recently we have crossed the line to where it is starting to create more problems than assisting in growth i.e. inflation in food and energy). 2) A proactive Fed - We may pay for this down the road, but at least in the short to intermediate term all of the liquidity in the form of interest rate cuts as well as the special lending facilities have kept the economy afloat.
Looking to the back half of the year, I am anticipating a rotation as we see stronger growth in the U.S. than overseas with the large amount of economic stimulus in the marketplace. We will, in my opinion, see a sizable pickup in the dollar (especially against the insanely overvalued euro) which in turn should help somewhat with the recent bouts of commodity inflation. I am expecting a large outperformance in domestic stocks over continental European stocks when this occurs.
Now a couple of things could throw this thesis off. First, if commodity prices do not retreat (especially oil), then it will be difficult to see significant growth in he economy. Second, the Government and Fed are always wildcards and while they can help us out they can also hurt us severely.
All in all, it will be a very interesting few months. I'll mention in a future post how, although I am positive on the last 2/3 of the year and into early next year, I see larger problems down the road (possibly in the mid to late 2009 period).