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The initial look by the Commerce Department at second quarter Gross Domestic Product (total output of goods and services produced in the United States) indicates that the trajectory of the economic downturn is beginning to level off. This stabilization is the first step toward a sustainable economic recovery.
The Commerce Department reported that GDP fell at an annualized rate of 1.0% during the second quarter, far less than the 6.4% and 5.4% drops recorded during the first quarter of 2009 and the fourth quarter of 2008, respectively. The consensus estimate had been for GDP to fall 1.5%. On an encouraging note, inventories continue to decline indicating that when domestic demand recovers, businesses will need to rapidly replenish their inventories resulting in stronger economic growth.
Another sector of our economy, one that helped lead us into this recession, that supports at least a bottoming of the economic downturn can be found in the housing market. A couple of weeks ago it was reported that housing starts rose 3.5% or by 20,000 to 582,000 during the months of June and building permits, a sign of future home building rose 8.5%. It is also very important to keep in mind that several hundred thousand homes need to be built each year due to the growth of the population in the United States as well as to replace those homes that are intentionally demolished or unintentionally destroyed.
The final piece to the “economy is bottoming puzzle” belief can be found in the labor market, and more specifically, claims for unemployment benefits. Continuing claims, made by individuals reapplying for unemployment benefits due to the expiration of their current claim, has fallen from a record high of approximately 6.9 million eight weeks ago to approximately 6.3 million this past week. This, once again, indicates a slight improvement in the labor market.
The above begs the question, “so what does this mean for my investment/retirement portfolio?” We have and continue to hold the belief that the move on the Dow Jones Industrial Average from its all-time closing high of 14,164 on October 9, 2007 to 10,000 on October 6, 2008 accurately reflected the severity of this recession. However, the move from Dow 10,000 to its closing low on March 9, 2009 of 6,547 was mostly panic driven. It then becomes evident that, as the panic subsides, a move back to Dow 10,000 over a period of time is likely. However, the pace at which we move toward this number will slow as it is approached. Furthermore, moving above Dow 10,000 will be predicated upon the success of the economy to right itself through the efforts by both public and private entities.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.