Economy Improving, But Not Hiring
"It's been an absolute home run in terms of economic activity," Mitch Stapley, chief fixed income officer of Fifth Third Investment Advisors, told investors recently at a Fifth Third economic outlook luncheon at Frederik Meijer Gardens.
Since the start of the war with Iraq in mid-March through the end of October, the Standard & Poors 500 Index has risen 32.8 percent, the Nasdaq Composite Index 52.5 percent and the Russell 200 Index 53.5 percent.
Corporate revenues were up 9 percent in the third quarter and 8.1 percent in the fourth quarter.
Operating earnings per share were up 22 percent in the third quarter and 24 percent in the fourth quarter, but earnings growth has come at a cost of 2.7 million jobs, Stapley said.
Business capital spending has been steadily rising this year, up 4.4 percent in the first quarter, 7.3 percent in the second quarter and 11.1 percent in the most recent quarter.
Business spending on equipment and software was up 15.4 percent in the third quarter, while spending on new facilities was down 2.4 percent.
The National Association of Purchasing Managers Survey for October showed a sharp improvement in orders, with orders up 64.3 percent and building expansions up 57 percent.
Inventories are still soft but there are potential growth signs, he said, because lean inventories typically stimulate a pick-up in manufacturing activity.
"What's so amazing is the unprecedented length of time it's taking for the economy to generate jobs again," Stapley said.
Job gains traditionally follow the end of a recession, but it's been two years since the recession ended and the economy still hasn't been able to generate jobs, he said.
As Stapley observed, the manufacturing sector has been especially hard hit by job losses, and Michigan is much more dependent on manufacturing, with 23.1 percent of business in the manufacturing sector vs. 14.2 percent nationwide.
In a traditional recession-rebound cycle, about 8 million jobs nationwide would have been created over the past two and a half years.
It brings to mind the jobless recovery of the 1990-1991 recession, Stapley said.
That period marked the first time since World War II that jobs weren't generated in the months following a recession.
Stapley said the lackluster job market threatens to weaken an already slow recovery. Consumers' concerns about job security and job prospects could undermine their spending behavior, which has carried the economy for the past couple years, he said.
While productivity has increased 8 percent and labor costs have decreased 20 percent, the demand for labor remains low.
He said productivity growth is fueling economic gains but hindering payroll growth. The hope, he added, is that higher productivity will lead to greater production and increased hiring.
From a historical perspective, he said, interest rates are still reasonable, with the rate on a 30-year mortgage now just above 6 percent.
Real estate is now a bigger portion of consumers' asset portfolios, he noted.
The stimulus of both monetary and fiscal policy has spurred investment, Stapley pointed out.
Home refinancing has been key to consumer spending.
Mortgage refinancing put money in consumers' pockets, which, in turn, gave the economy a $95 billion boost. But refinancing activity has dropped since interest rates started to inch up.
Since consumer spending accounts for 70 percent of the nation's spending power, a consumer retrenchment could take some of the wind out of the economy's sails, he said.
Stapley predicts stocks will outperform other asset classes going into 2004, with likely returns in the high single digits.
Bond investors need to be particularly attentive at this time because interest rates will probably go up, and employment growth will push rates higher.
The Federal Reserve has kept its target for the federal funds rate at 1 percent so far this year.Stapley anticipates Fed policy on interest rates will lag behind the market in general.