Cambridge Advisors Inc.
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Economic news continues to improve. GDP growth for 2nd Quarter is estimated at -1.0% compared to an expected -1.5% and much better than 1st Quarter’s -5.5%. Further examination shows that inventory reductions were higher than previously thought. With an expected slowdown in inventory reductions, a continued decline in the trade deficit and a turnaround in homebuilding, future GDP growth is projected to be positive in the second half of the year, meaning we will have emerged from the recession.

Other economic measures including unemployment have also been reporting positive surprises. Initial jobless claims were much less than expected last week and unemployment actually fell from 9.5% to 9.4% (but mostly because people were leaving the job market). Retail sales increased 0.6% in June compared to a 0.4% consensus estimate. Personal consumption increased by 0.4% compared to an estimate of 0.3%. Durable goods orders were up 1.1% in June if transportation is excluded (that marks the second straight month of
increases). The Cash for Clunkers program has spurred auto sales in July so consumer  spending in July should be higher (although displaced demand from May and June may account for some of the strength and a continuation of the program may steal sales that would have been made in later months).

The housing market may have formed a bottom as home sales figures across the board have been improving. New single family home sales increased 11% in June which was the largest one month increase in nearly 9 years. Existing home sales were also up 3.6% in June as were June Housing Starts. All three measures were above the consensus estimates. Economist Brian Wesbury of First Trust estimates that the national average home prices are close to fair value and any further declines should be concentrated in the major metropolitan areas where overbuilding was the greatest.

Companies have been reporting their 2nd Quarter earnings – 75% of companies have beaten the analyst expectations. Yardeni Research shows that earnings have been 18% better than expected. It’s not unusual for companies to beat expectations coming out of a recession because those expectations are usually pessimistic and low.

Much of the money that came out of the stock market in 2008 and early 2009 is still in money markets, but the volume and breadth of trading has been increasing as the market advances. Equity mutual funds have seen positive inflows each month since April. With the S&P 500 Index up nearly 50% from its low, many people who are still on the sidelines are now uestioning, “Is it too late to join the party?”

The S&P 500 Index is still 35% below previous highs which means it needs a 54% return from current levels to reach new highs. These returns may not happen as rapidly as the recent rally, but even if it takes five years to reach those levels, the return would be a 9% average annual return.

Although the economic numbers are improving, the journey to reach new highs may not be smooth. The economy needs to show good numbers, not just improvement or belief that the worst is over. ISM for manufacturing and non-manufacturing are still at levels that indicate contraction. Jobs will need to be created to further reduce unemployment. Personal Income fell 1.3% in June which was more than the consensus estimate. People are still saving more than they had been and spending less. Government spending is increasing the debt, and higher taxes and inflation are a strong possibility. These factors can create headwinds for economic growth, and we may endure more volatility in the path to new highs for stock prices.

Cambridge Advisors is committed to working closely with our clients to create and implement investment plans so that they may reach their financial goals. We appreciate the trust you have placed in us. If you have any questions, or if you have friends and family who would like to be introduced to Cambridge Advisors to see if a relationship with us would benefit their situation, please do not hesitate to call us.

Lori L. Liffring, CFA
Michael L. Bridgman, ChFC
Gaylan C. Abood, CFA
Justin S. Anderson, MBA AAMS
Karen K. Benefiel, CPA AAMS
www.cambridgeadvisors.net
402-697-1166
17330 Wright Street, Suite 205
Omaha, Nebraska 68130
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Economic Update August 2009

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