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Posted: September 13, 2009

Nine signs that point to recovery

Things are getting better faster than expected

Bill Greiner

In July, we predicted that the U.S. economy was going to start to show increasing signs of economic recovery and the financial markets would appreciate in value in anticipation of these positive developments. This has happened, perhaps more rapidly than we anticipated.

Now that the consensus of stock market pundits believes our thesis to be correct, where exactly are we in this process?

Economic Update
Over the last eight weeks, 67 percent of the economic reports released were positive. This level is surprisingly higher than normal, which explains why the stock market has performed so well over the last two months.

The stock market's rise, coupled with the magnitude and consistency of the "positive surprises" has led us to a higher level of conviction regarding the accuracy of our thesis. Specifically, consider the following nine recent economic developments:

• Trade is improving: the trade deficit for the month of June was reported at -$35.9 billion. Late last year, the trade deficit was running in excess of -$50 billion per month!

• Corporate profits have turned up: for the second quarter of this year, U.S. corporate profits were reported at $1.275 trillion, up 13.5 percent since late last year.

• Vehicle sales are surging: Vehicle sales during the second quarter of this year were reported at 9.6 million units. During the month of July, sales were reported at 11.0 million units, outperforming the entire second quarter in one month! August appears to be on track for sales at a 14 million level, up 60 percent in 60 days.

• Vehicle production is ramping: production levels are up roughly 75 percent since late last year.

• Employment declines are moderating: U.S. payroll employment shrank by 247,000 during July. On an absolute basis, this is not good news. However, earlier this year more than 700,000 Americans were losing their jobs! So, while the employment base is not yet healed, we are apparently "Climbing out of the Hole" regarding the employment picture. 

 •  The decline in housing values appears to be less severe: The Case-Shiller report recently showed that U.S. house prices declined by 0.1 percent during May. Earlier this year, this same survey showed that housing values were contracting by more than two percent per month.

• Consumer net worth has turned upward: ISI recently reported that coming into the third quarter, U.S. consumer net worth had increased by roughly 6.2 percent since earlier in the year. While nowhere near the peak net worth reported in 2007, this represented the largest gain in quite some time.

• Foreign economies are improving: while certainly not conclusive, many foreign countries have reported positive GDP growth for the second quarter of the year. Singapore, China, Korea, Indonesia, Japan, Germany and France all reported positive GDP growth rates, indicating that the recession has ended in these economies. From a definitional standpoint, the recession is no longer worldwide in scope.

• Productivity is rising nicely: during the second quarter, productivity surged at a 6.4 percent annual growth rate. Year-over-year, U.S. unit labor costs shrank by a 0.6 percent rate. This is good news for corporate profitability, inflation and eventual employment trends.

To be sure, many negative economic reports will continue to be released. An economy does not recover in a straight line-- it is a process of "backing and filling." For example, while the real bloodbath regarding employment losses may be behind us, we don't expect to see real improvement in employment trends for quite some time.

However, we believe the balance of the evidence suggests that the economy is heading toward serious improvement.

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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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