Weekly Market Commentary 8-1-2011

There is Only One Way

Tim Phillips, CEO – Phillips & Company

one way only sign

As we expected, it looks like the political class will get something done. As anticipated, The Debt Limit Deal also looks like it's heavily back loaded (much ado about nothing). In fact, all the real cuts to spending will likely come under a different congress and perhaps a different President. Now that the "fiscal conservatism" charades are behind us, we can look at the one and only way to really cut deficits and our debt – GDP growth.

In the middle of the debt debate we received a pretty ugly report card on our economic activity. According to the BEA, real GDP in Q2 grew only 1.3% compared to a consensus estimate of 1.9% and Q1 GDP was revised downward to a mere .40%. While the top line number looks weak some of the component parts look pretty good.

  • Real nonresidential fixed investment increased by 6.3% in the second quarter, compared with an increase of 2.1% in the first.
  • Real residential fixed investment increased 3.8%, in contrast to a decrease of 2.4%.
  • Real exports increased by 6%.
  • The change in real private inventories added 0.18 percentage points to the second quarter change in real GDP.

The one area of concern, and it's the biggest, is consumption (70+% of GDP). This area had very anemic growth. However, much of the drag came from autos and I attribute much of that to the events in Japan.

contribution to percent change in real GDP

It looks like the automotive industry is ramping up for better supply and demand from the consumer, which should bode well for the strong second half of 2011.

As long as we can get our "sausage making" debate about the debt behind us soon and create stability for business, I believe they will begin to hire and continue to spend. This should boost confidence with the consumer and allow them to free up their pocketbooks a bit. With savings rates at 5.0% and corporations sitting on a mountain of cash there is plenty of fuel in the tank.

corporate cash as percent of assets

personal savings as a percentage of disposable income

Once we get some stability from the political class, American businesses and consumers can do what they do best – innovate, create, invent, invest with the outcome being spending.

Remember, investing is anticipatory and requires us to look at past data and make intelligent guesses about the future. I see a pivot, not a growth surge mind you, but a resumption of growth and employment and I'm a buyer (assuming our political class get its act together).

Thank you for your thoughts and comments, please keep them coming.

Tim Phillips, CEO - Phillips and Company

Twitter: @PHCOAdvisors

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Primary research done by Adam Gulledge, Associate – Phillips and Company