20 Feb 2004 This ‘Bears’ Repeating
Remaining economic and market bears may soon be forced into hibernation. Even the most obstinate of naysayers may have to acquiesce to the improving economic outlook. As is the case every four years, the primaries have taken center stage in the media and most of what we hear is the obligatory bashing of the economy and the current administration’s economic policies.
Mr. Greenspan’s optimistic words were taken to heart by many investors last Wednesday when the market jumped enthusiastically. But those words seem forgotten today as the labor unions pound the drums of political war and jump on Mr. Kerry’s bandwagon. Their statements seem carefully choreographed as they ask in unison ‘where areAmerica’s jobs?’
Politics aside, the jobs are coming. The economy is improving and business leaders are growing more optimistic that it will continue. The recent spate of mergers is proof that managers are more confident in their own businesses and in the larger economic environment in which they operate.
The reality of job growth is presented in the graph below. Please note that the trend in unemployment claims has steadily declined since peaking at 450,000 in April of last year. If the trend continues, and we strongly believe it will, we will see jobless claims numbers below 300,000 by this summer. Interestingly, the weekly unemployment claims numbers were actually higher than 300k during the economic boom of the late 90’s and in November when President Clinton was re-elected for a second term. In short, job growth is improving and looks to accelerate in the coming months.
Managers have squeezed about all they can from the unprecedented wave of productivity they have enjoyed for the past few months. Only so much time and output can be expected from existing workers and technology. Overtime hours are finite and installed technology can only be tweaked so far.
Corporate profits surged last year as managers cut costs and benefited from the huge productivity of their existing capital (plant, workers, and technology). The latest round of fourth quarter earnings reports suggests that a full two-thirds of companies in the S&P 500 beat analysts’ earnings estimates. At the annual Business Council meeting of corporate CEO’s inBoca Raton,Florida, corporate leaders are much more upbeat than they were last year on earnings prospects and on hiring plans. Eli Lilly’s CEO suggested the company may hire between 2,000 and 3,000 additional workers this year. Bloomberg, quoting a survey of CEOs at the conference, said that over 40% of the 121 chief executives invited to the conference expected to increase theirU.S.hiring this year.
One reason is that inventories of American companies are at unprecedented lows compared to sales. If demand continues, and signs point to that fact, production will have to increase to replenish those low inventories. If indeed, productivity has been stretched to its limits, as Mr. Greenspan and other leading economists suggest, job growth will be the inevitable outcome of the coming manufacturing boom.
As to the stock market, we believe the pause to digest the gains of the last few months will continue for another month or two. We expect market leaders to be Diversified Financial Services, Telecommunications Services, and Transportation. Technology as a group should resume its market leadership as well. Technology spending by businesses will be spurred by continuing tax incentives and the recent overwhelming evidence of its benefits in improving productivity. Job growth will surge in the coming months, further fortifying the real engine of this economy, the consumer. Sleep tight bears.