Continue reading Ray of light: China's manufacturing sector continues to strengthen

Ray of light: China's manufacturing sector continues to strengthen originally appeared on BloggingStocks on Thu, 03 Dec 2009 10:00:00 EST. Please see our terms for use of feeds.

Economists were both surprised and elated that GDP growth exceeded expectations and rose 3.9% for the third quarter [subscription required]. While the housing and mortgage crisis hurt growth and brought down the GDP, it was more than offset with a 2% increase in consumer spending and a 1% increase in international trade, as exports surged thanks to the falling value of the dollar. Many economists believe it was this strong showing in the GDP that influenced the Fed in its decision to cut interest rates by just one quarter percent rather than one half percent.

The key question now is: will it last? Many economists don't think so. They explain that the the first signs of weakness in the economy were at the end of the quarter in September and the full impact of the housing and credit crisis won't be felt until the fourth quarter. Economists expect the fourth quarter growth rate to be closer to 1%. Consumer confidence dropped in October because of the housing and mortgage mess. Since consumer spending accounted for 2% of that 3.9% growth, if consumers hold back their spending, it will have a significant impact on fourth quarter growth. Escalating food and fuel prices could be another key factor that could hurt growth as could unemployment claims, which edged higher as the impact of the slowing housing market is being felt in other sectors of the economy.

Retailers face the biggest problems as we enter the fourth quarter -- their most important quarter of the year. If holiday sales fall below target, many retailers will be facing a bad year.

Don't start celebrating yet. Economists think we're headed for a drop in the fourth quarter and that will be followed by weaker quarters in the first half of 2008. Where do you think we're headed?

GDP growth surprises economists, but will it last? originally appeared on BloggingStocks on Thu, 01 Nov 2007 12:33:00 EST. Please see our terms for use of feeds.

Mr. Bernanke: Retail sales or GDP growth? originally appeared on BloggingStocks on Thu, 06 Sep 2007 13:52:00 EST. Please see our terms for use of feeds.

Continue reading GDP growth better than expected -- enough to boost stocks?

GDP growth better than expected -- enough to boost stocks? originally appeared on BloggingStocks on Fri, 27 Jul 2007 10:05:00 EST. Please see our terms for use of feeds.

Are we facing stagflation -- the dreaded combination of slow growth and high inflation? That's the question that comes to mind in reading this morning's report that first quarter economic growth fell below expectations and inflation jumped higher than it has in 16 years.

I have written about stagflation before but this morning's report is the most dramatic evidence yet that it might be here. GDP growth of 1.3% in the first quarter is well below that of previous quarters -- GDP grew 5.6% in Q1 2006 and 2.6% in the Q4 2006. But the kicker is that inflation -- as measured by the GDP price index -- grew at 4% in the first quarter, the highest rate in 16 years.

If stagflation persists, it could be bad for stocks. During the 1970s, stagflation kept stocks virtually unchanged for an entire decade. The problem is that if the Fed decides to raise interest rates to check inflation, the economy slows down. But if the Fed cuts rates to spur economic growth, prices spin out of control and the dollar drops in value -- following the report the dollar fell to an all-time low against the euro. This forces bond issuers to raise rates to attract foreign investors. And the higher interest rates cut economic growth.

With the U.S. economy so heavily dependent on debt -- both to consumers and to other governments like Japan and China -- the persistence of stagflation could paralyze the economy and the markets for a long time.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.

Stagflation? originally appeared on BloggingStocks on Fri, 27 Apr 2007 10:24:00 EST. Please see our terms for use of feeds.

According to a piece in today's New York Times, economists expect good but not great things for 2007. Merrill Lynch's Chief Investment Strategist Richard Bernstein projects a 12% rise in the S&P 500. Abby Cohen sees the S&P going up modestly, and UBS's David Bianco expects multiple expansion. Some economists worry about the Fed and others are concerned that investors are too bullish about GDP growth. But all in all, they are expecting it to be a good year.

The problem, according to investors like David Dreman, is that positive sentiment is often a contrarian indicator. In his book Contrarian Investment Strategies, he provides compelling data that show that even the best analysts and economists are often wrong -- and by a problematic amount.

So it may be wise to exercise caution in the face of bullishness. As Warren Buffet often says "The secret is to be fearful when others are greedy and greedy when others are fearful." I hope the analysts are right, but I wouldn't be making investment decisions based on their predictions.

Analysts are bullish: should you care? originally appeared on BloggingStocks on Tue, 02 Jan 2007 12:44:00 EST. Please see our terms for use of feeds.