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Posted: August 18, 2009

Economic rebound in sight

Next few months should show recession is over

Bill Greiner

In recent weeks, we have repeatedly addressed the issue of recession and recovery. It is our opinion that the contraction in economic activity is bottoming. In the next few months, we expect to receive solid evidence that the recession is not only over, but the economy is starting to grow once again.  Our outlook is calling for a weaker-than-normal economic rebound, but a rebound nonetheless. 

In our view, it is important to track economic events along with our outlook ¬– to guide investors and businesses as to the recovery’s progress. Toward that end, this piece will be the first in a series to be released over the next few months. 

Evidence
While the genesis of the current economic contraction is debatable, there is no questioning the effect of the collapse of the housing market. The decline in the value of the nation’s housing stock has not only spread havoc within the financial system, but it has also damaged consumer psyche and slowed the consumer’s willingness and ability to spend. Tracking pricing, inventories and sales rates within the housing sector is important. 

The Case-Shiller housing index was recently released for the month of May. The index measures prices in many major markets, from New York to Los Angeles, to Seattle to Miami. While this index is not all-inclusive, it gives us a glimpse as to how the housing market is faring in major markets. 

In May, the Case-Shiller index increased by 0.5 percent – the best reading this index has seen in the last two and a half years! This is good news for the consumer and the housing market in general. For those who are wondering why we are optimistic about such a small increase, the answer lies in the first rule of hole management: If you want to get out of the hole you’re in – stop digging.

Let me explain.

Quite recently, this housing price index was reporting negative numbers in the 2 percent range.  Now, the index is back on the positive side. This is a huge improvement in the overall state of the major residential real estate market in the U.S., and it happened in a fairly short period of time. This is not an indication that the housing market is completely healed, but it appears that much of the price damage within the major markets could be behind us.

Staying with the housing theme, U.S. new and existing home sales data has recently been released. Since their bottom, it appears new home sales are up 16.7 percent and existing home sales have rebounded 8.9 percent. 

June housing starts were up 21.5 percent from earlier this year. Now, these numbers are coming off very depressed levels, and are not an indication that the housing market is fully functional.  Sales rates are still low, inventories are still high and pricing has yet to rebound. However, it appears that the housing market is currently attempting to climb out of the hole it has been in for quite some time. 

Other recent items
In addition to the housing data, vehicle production for the first three weeks of July averaged 7.1 million units on an annualized basis. For the month of June, production was 4.1 million units on an annualized basis. A ray of sunshine for the folks in Detroit (and they need it). 

Steel production is also starting to increase. Confidence levels are on the rise in France and Italy.  Certainly things could be (and have been) much worse. For instance, Lithuania’s GDP in the second quarter of this year contracted at a 32.5 percent annualized rate!  I am glad I live in Kansas City, and not Vilnius (the capital of Lithuania).   

Summary
While it is still too early to declare a full-swing economic recovery, and unemployment will probably continue to grow for a while, it appears we are finally seeing indications that bottoming is underway. Stay tuned.

Disclosure and important considerations
Scout Investment Advisors offers investment management services for both managed accounts and mutual funds. Our investment capabilities include domestic large cap, mid cap, small cap and fixed income. Scout Investment Advisors also offers international, international small/mid-cap and global equity portfolios. Scout Investment Advisors, Inc. is a subsidiary of UMB Financial Corporation.

This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of Scout Investment Advisors and the information available at the time this report was published.

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Bill Greiner is the president and chief investment officer of Scout Investments, Inc.,a subsidiary of UMB Financial Corporation that offers investment management services for both managed accounts and mutual funds. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation.

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