Hopeful Signs of Improvement
By: Dr. Charles Lieberman
Date: 9/2/2008
The economy performed far better in the second quarter than almost anyone expected a few months ago. Interestingly, some projections for the second half have been reduced, even as the evidence begins to mount that the housing sector is approaching a bottom. Most likely, the economy will continue to muddle along, as credit market problems restrain growth, offsetting improving conditions in the housing market.
GDP rose 3.3% in the second quarter after revision, despite a large drag from inventories. Final demand rose 4.8%. That erosion in inventories is just temporary. In time, business must resume inventory accumulation, or stocks will be depleted. The mere reversal of this drag on the economy will add about three quarters of a percentage point to future growth over the course of a year. Similarly, a mere flattening out of the housing sector will add about a full percentage point to GDP. So, inventories and housing will make up for some slowing in other parts of the economy, for example, exports, which may be hard pressed to sustain their rapid rate of increase. Forecasts for a decline in GDP for the second half require some creative and very negative assumptions. More likely, the economy will continue its weak growth.
A major threat to the economy remains in place, however. Poorly functioning credit markets have the capacity to inhibit spending and could lead to a more serious decline in activity. I'm making the assumption that policymakers, who clearly do recognize the problem, will prevent the travails of the credit markets from inflicting even more damage on the overall economy than has already occurred. It seems that hedge funds and other vested interests have maintained a high degree of fear in the marketplace by spawning rumors that threatens companies and the economy. Just a few weeks ago, we were waiting with bated breath of the imminent nationalization of Fannie and Freddie. Now, stories abound that both GSEs may muddle through. A few weeks before Ambac and MBIA were toast. Instead, the stocks have rallied strongly. It appears their shareholders will get to divide a substantial book value, even if their entire book of business runs off. How quickly rumors of the sky is falling are disproven. Still, such fear mongering is very much a key part of the risk to the economy and policy makers must rein it in. At a minimum, the healthy functioning of the credit markets must be restored to assist in an economic recovery. Download this article in PDF Format
About Advisors Capital Management, LLC
Advisors Capital Management, LLC (ACM) is a provider of managed portfolios and financial services for industry professionals and their clients. As investment strategist, Dr. Lieberman oversees the company's "Portfolio Partners" investment program. Additionally, he provides guidance to the ACM Wealth Coordinators who integrate the work of financial advisors, financial planning, tax, estate and portfolio management professionals to build, protect, and maintain clients' wealth. Although the information included in this report has been obtained from sources Advisors Capital Management, LLC believes to be reliable; we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
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