The Missing Ingredient: Confidence

Includes: DIA, QQQ, SPY
by: John M. Mason

The one thing that this economic recovery has lacked is confidence. It is one thing an economic recovery needs.

Yes, the figures from the Institute for Supply Management, the Purchasing Managers Index (PMI), had been riding high over the six months ending in December 2013. The index average 56.2 for this period; for the previous six-month period the average was 51.6; and the six months before that the index averaged 50.8.

The jump in the last half of 2013 gave people looking for green shoots something to cheer about. It looked as if the economy were really starting to grow more rapidly… even accelerate.

And, then January came. The index dropped to 51.3.

This was just one month. And the weather in January was not-so-good. February was also not-so-good. We will have to see what actually happens to the figure.

Overall, however, the average of 56.2 in the last six months of 2013 was not-so-good by historical standards, but it was an increase… and a pretty good increase at that.

The problem is that the economic recovery is over 4 ½ years old and people are still jumping on the PMI as a sign that economic growth is really going to take place.

Think about this for a minute. We are 4 ½ years into the economic recovery and just slightly more than fifty percent of the purchasing managers in the United States believe that this month's activity is better than last month's.

Not a booming vote of confidence, but when you look at the figures going back a year or more, it is an improvement.

But, business confidence has never been strong in this recovery and this seems to be one of the major things that is missing.

One indication of this lack of confidence is that many companies are still sitting on piles of cash. The technology companies are the leaders in this.

Sarah Gordon writes about Europe in the Financial Times, "Investors are hoping to see signs that Europe's companies are finally beginning to spend after several years of hoarding cash."

Nothing new on the United States.

Ms. Gordon continues:

"An influential survey of fund managers by Bank of America Merrill Lynch released in January showed a record 58 percent of investors polled want companies' cash piles spend on capital expenditure… less than a third of asset managers surveyed wanted companies to return more money to shareholders."

"So far, though, the fourth-quarter earnings season has given little reason to suppose a spending spree is imminent, or that companies are heeding investors' call to put their money to work.

In fact, quite a few companies are talking about reducing their capital expenditures.

One analyst is reports "There is still a lot of nervousness about committing to capex… capital expenditures."

Another side to this, however, is that if companies do not start adding more to their physical capital, in a few years, "they will start to need replacing capital stock that has worn out during the recent years of subdued spending.

Well, the latter reason for increasing capital spending is not very encouraging. It basically says that business may increase capital expenditures because they cannot maintain current levels of output because the capital they have is wearing out.

Not very confident.

In America the presence of uncertainty and the lack of confidence looms large… as it has since 2009. Leadership in the US Congress is almost totally absent. And, part of this is due to the fact that leadership from the White House is almost totally absent.

Listen to what Maureen Dowd says in the New York Times this weekend. She states that President Obama engages "in thoughtful inaction." His "ethereal insipidity" and "insistence on the cerebral" provides a lot of quotable speeches but little in the way of consistent and coherent policies, programs, and laws.

The economist John Maynard Keynes believed a recovery required "animal spirits." There seem to be no animals around… let alone animal spirits.

The opposition in congress, sensing the absence of leadership, acts to stall or defeat almost anything that is proposed.

Then there is the rest of the world. Europe is not growing and there is increasing talk of deflation on the continent. Emerging market countries are teetering on the edge and are afraid that if the Federal Reserve continues to taper its purchases of securities that they will face dire consequences. And there is China. Is China going through a housing bubble and what about all the lending from shadow financial institutions and more: will the Chinese economy slow down and hence slow down the world economy?

And, then there in Syria, the Ukraine, Egypt, Argentina, Venezuela, and unrest in the world.

Plus, the United States economy has only been growing about 2.0 percent a year during its recovery from the Great Recession; labor force participation has dropped to about 63.0 percent, the lowest level in over thirty years; and the capacity utilization in manufacturing rests under 80 percent, the lowest "peak" level of utilization achieved since the statistical series was begun in the 1960s. Seemingly, a lot of structural re-construction needs to be done on the US economy before it can become more robust.

A high degree of confidence is missing from the economic picture. There seems to be no one or no country that can provide what is needed to cheer up the troops and get them to commit to the future.

The S&P 500 stock index reached an inter-day high that was a new record, although the closing figure was below the closing record. The Dow-Jones average has reached new highs in recent months. Yet no one really seems to be overly joyous about these achievements.

For one, corporate profits do not yet seem to be keeping up with investors' view of where stock prices might be. This, of course, can lead one to think that the high stock prices is nothing more that a result of the Federal Reserve's largesse in pumping billions and billions of dollars of reserves into the banking system. Thus, there seems to be no spillover of enthusiasm for the purchase of stocks to an enthusiasm for corporate managements to spend on capital equipment.

Confidence is important. The question is, where are we going to find some?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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