The Back Alley Archives

By Jon Markman
What if they gave a recession and nobody came?

That's the question that government, private economists and all of us at home are going to have to mull this summer, as an unprecedented flood of monetary and fiscal stimuli, and renewed global demand for our agricultural and industrial exports, appear to have yanked the U.S. economy out of a nose dive and landed it for a slow roll on the tarmac with just a few bumps and bruises.

This might not be everyone's idea of a perfect soft landing for an economy that was screaming along at 5% annual growth during the days of easy credit three years ago, but it's also not the crash that bears have been fearing.

One of the nation's top independent economists reported this week that his data show the United States is now on track for at least 1% annualized economic growth through the first half of 2009, with no three-month spans forecast in the red.

That economist, Ed Hyman, one of the few number crunchers to whom portfolio managers actually pay attention, acknowledges that his finding is surprising, considering he alerted clients at the start of the year to go on "high alert" for recession.

Yet the founder and leader of ISI Group in New York called off his alert Wednesday because he believes that improving credit markets, powerful federal policy action and a massive wave of investments from the global glut of commodity money will bolster U.S. corporate and consumer balance sheets enough to allow industry to muddle through at least the next 18 months without serious disruption.

Rebates and rebounds
If things do go better than expected, you may wish to buy low-price energy stocks to take advantage, as they have the greatest built-in growth prospects. I know this idea flies in the face of the conventional wisdom that you'd want to avoid stocks at times like these, or buy beaten-down retailers and banks, but that just goes to show how topsy-turvy the link between stocks and economic growth is.

Consider that gross domestic product grew at a fast 4% annualized rate in 1994 while the broad market sank 2%. A year later, GDP growth plunged to 2%, but stocks advanced 34%. Weird, but true.

I'll give you a list of my top small-capitalization and midcap picks in a moment, but first let's explore what's happening under the surface of this crazy economy.

One big upside surprise could come from a source everyone has already discounted: tax rebates. Hyman thinks the effect may be astounding, lifting disposable income for consumers by 16% quarter over quarter. And there's a little-known nuance in the rebate code that allows for $50 billion in tax savings for corporations from accelerated depreciations, which will also likely go straight to U.S. industrial suppliers such as Emerson Electric (EMR, news, msgs) and Ametek (AME, news, msgs).

The jobs market may be in better shape than most suspect, as well. Hyman looks at household employment, rather than figures from the Bureau of Labor Statistics, every month because household employment better captures the swelling work forces of small business. By this measure, monthly employment increases over the past year have averaged 97,000 and are well up from their low of 3,000 in December.

Meanwhile, the four-week average of unemployment claims is down, while indexes kept by independent companies Automatic Data Processing and Monster both ticked up in April, in defiance of the weakness displayed by the government's data-gathering process.

Inflation trends may help, too. Despite what you sense from your own life about higher food and energy costs, the main input for inflation is wages, and they are flat at best. Inflation rarely rises at times of economic softness, and though we are hearing a lot about stagflation, a rare condition unlikely to occur while the costs of the biggest things on which we spend money -- homes and cars -- are falling.

Some aggressive companies such as Starbucks (SBUX, news, msgs) and McDonald's (MCD, news, msgs) are even cutting prices selectively in an effort to grow market share. China also remains a deflationary force; Hyman notes that it is stepping up low-cost production of high-tech medical devices such as MRI machines for export.

Meanwhile, the amount of money pouring into the economy from U.S. and overseas corporate investments is staggering. Hyman provided a list of capital investment plans announced just in the past week that includes $8.6 billion by Russian mining giant Uranium Holdings, $1.6 billion by Bristol Myers (BMY, news, msgs), $2 billion by British American Tobacco (BTAFF, news, msgs), $1.7 billion by Stone Energy (SGY, news, msgs) and $1.9 billion by giant German copper smelter Norddeutsche Affinerie (NDEAF, news, msgs).

It can be a positive. Out economy tanks and thus out products are cheaper for people importing them and thus they buy more of our stuff.