Warren Buffett is quite clearly a stellar judge of value, but that is not the same as being a leading indicator "” particularly of this economic cycle.
Nor, for the most part, do his views into the state of business at his railroad, bank and other diverse holdings provide much clarity about the future path of recovery.
For example, as explained in this fine article by IBD's Norm Alster, railroads are benefiting from a number of factors, including a shortage of trucking capacity and a halt to wheat exports from Russia.
Still, industry growth has slowed in recent months, and much of the strength has come from the shipment of finished goods, a coincident indicator.
While Buffett may be correct that the economy isn't headed for a double-dip, the train is moving uncomfortably slowly as it approaches a hill that, on the current track, looks like it may begin to get pretty steep in mid-2011.
Here is the case for a very cautious economic outlook, though one that likely wouldn't point to an outright double dip without some external shock such as sovereign default.
1) Evidence of slowing new orders and backlogs amid a rebuilding of inventories suggests the factory recovery is gradually downshifting into first gear and possibly neutral.
2) Two months of flat disposable personal income, adjusted for inflation, amid slow job growth is consistent with little consumer momentum.
(Sales-tax holidays likely boosted August retail activity, so September and October data will provide a clearer view.)
3) Add in the emerging glut of housing supply, which is expected to put downward pressure on home prices, and you have a recipe for continued consumer caution.
4) Finally, consider a leading indicator that has outsized importance in this economic cycle "” federal, state and local fiscal policy.
While a drag on income growth from the unwinding of temporary Census jobs is coming to an end, it appears likely to be replaced and amplified by austerity measures at all levels of government.
In the very short term, the fiscal drag may not exert a very strong pull. The recent extension of federal aid to state and local governments will help defer many job cuts, but only to the middle of 2011.
Even so, on the federal level, an estimated 3 million will exhaust their extended jobless benefits by the end of this year.
Assuming Republicans take the House and the Senate is nearly evenly split, any tax increases may be put on hold. That, along with a last burst of stimulus concurrent with tax refund season, may keep growth on a slow, even trajectory for a time.
But by mid-2011, stimulus will largely be exhausted. At that point, with Republicans campaigning on a platform of austerity (compared to current policy), odds are better than even that Congress won't be of a mind to provide any more crutches for the economy.
Should all of these factors come together (a virtual end to inventory rebuilding; minimal gains in real disposable income; further housing weakness; and an increasing fiscal drag), the engine could slow to a crawl. That, in turn, would worsen the deficit outlook and could create deeper doubts about the fiscal future.
All in all, the stretch of track just around the bend looks like a tough slog.
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