Investment adviser: Economic outlook starting to improve

Doug May

While Doug May doesn’t believe the U.S. economy has fully emerged from recession, he’s pleasantly surprised by some of the indicators that signal growth.

“There are some things unfolding that are really positive,” said May, president and chief investment officer of May-Investments in Grand Junction.

Corporate earnings have been especially impressive. Short- and long-term interest rates have remained low. And the stock market likely will hang on to gains from 2009.

Moreover, the components of a leading economic index May has developed are now evenly split between weakening and improving indicators.

The one factor still missing is adequate access to capital, but May said he hopes regulators will loosen restrictions and allow banks to increase lending. “We’ve got to allow banks to function.”

In updating his economic outlook for 2010, May said some of the predictions he made in January were accurate and some were not — thankfully so.

May said in January he expected the economy to “muddle through” 2010, stabilizing at recession levels with only tepid growth and continued high unemployment rates.

May predicted gross domestic product, the broad measure of goods and and services produced in the country, to grow at an annual rate of 1 percent.

GDP grew at 2.4 percent during the second quarter. May said GDP growth for 2010 likely will come in a little higher than his initial forecast.

May predicted the U.S. unemployment rate would remain high at 9.5 percent. That prediction has proven accurate with little prospect for substantial improvement before the end of the year. Although job losses remain at recession levels, the number of job openings has been increasing, closing the gap between the two, he said.

Since employment levels typically constitute a lagging indicator, the economy could improve before job growth occurs, May said. “I’m not waiting for jobs to turn up before I get optimistic.”

May initially expected short-term interest rates to move moderately higher and long-term rates to move higher. But that hasn’t been the case.

“That’s a good thing,” he said.

The stock market has swung up and down so far in 2010, tracking close to the historical trends for years with mid-term elections, May said. That means a rally is likely toward the end of the year, although perhaps not to the same degree as in a year without a mid-term election.

In January, May expected the stocks of companies in the health care sector to fare well, while the stocks of companies that sell consumer goods to fare less well. The exact opposite occurred with consumer cyclicals leading the way, he said.

A stronger dollar in comparison to foreign currencies could have hampered exports of pharmaceuticals, May said. In addition, European governments cutting budgets have reduced health care benefits, including reimbursements for drugs.

Overall, though, corporate earnings are up and meeting analyst expectations, May said. “Corporate America has done an amazing job at right sizing in this environment.”

Improved corporate earnings bode well for growth in the near future, he added. “This is real strength. This is legitimate strength.”

May said he expects growth in the consumer staple and health care sectors as well in as the technology sector.

International markets show improvement, too, he added.

While many U.S. companies have done comparatively well, May said they’ve been hoarding capital and have remained reluctant to assume the risks associated with expanding facilities or increasing staffing. The situation could change, though, once what May described as largely a “confidence issue” is resolved.

What May doesn’t expect is what’s been dubbed a “double-dip” recession. That’s because he doesn’t believe the U.S. has fully emerged from recession. Nonetheless, there are signs the economy soon could improve, he added.

The 10 components of a leading economic index May has developed are evenly split between weakening and strengthening indicators.
Commercial and industrial lending levels are down, as are measures of global trade, new orders for manufactured goods and optimism among small business owners.

At the same time, though, measures of consumer spending, corporate profits, oil and natural gas drilling activity and semiconductor manufacturing are up.

“We’re in better shape than I thought we would be in,” May said.