How to Invest In the Economic Rebound

Anthony Mirhaydari MSN Money June 9, 2011

6/8/2011 8:10 PM ET

By Anthony Mirhaydari, MSN Money

A stream of bad news on jobs, Greece and so much else makes it hard to believe. But this latest reversal will run its course; here's how to play the re-recovery.

/* Related topics: stocks, economy, ETF, health, Anthony Mirhaydari

For the second year in a row the economy, just as it was beginning to pick up speed, has smashed into a wall. And here we are again, wondering if the pieces can be put back together or whether we're really headed into a double-dip recession.

Last year, the problems were Europe's debt woes and the Greek bailout. This year, it's again about Greece. But it's also about $4-a-gallon gasoline, jobs, bad weather, government spending cuts and production setbacks out of Japan.

Optimism has once more faded into fear and disbelief. The Citigroup Economic Surprise Index, which tracks whether economic reports are better or worse than expected, has plunged to depths not seen since the worst of the financial crisis. Data on factory output, consumer confidence and jobs have all disappointed lofty expectations. Wall Street economists are frantically marking down their forecasts for the rest of the year.

Growth has slowed to a crawl, with first-quarter growth of gross domestic product at just 1.8%, below the economy's stall speed and well below the Street's 3.5% estimate from February. Unemployment has moved back over 9%. Stocks have fallen for five consecutive weeks, something that hasn't happened since 2004, as smaller, riskier stocks get hammered. Investors have tried to seek refuge where they can, but defensive stocks, Treasury bonds and even gold have all come under selling pressure in recent weeks.

Anthony Mirhaydari

This all sounds depressing, I know. I started warning of trouble for the economy and the financial markets a few months ago in my columns and blog posts, and we've certainly seen that trouble.

But here's the thing: The economy is already on the mend. And soon, that should translate into higher stock prices and a reacceleration in the economy -- enough to send GDP growth as high as 4.3% in the fourth quarter, according to Deutsche Bank.

I know that's hard to believe. But let me explain what I'm seeing and then offer some investments to help you take advantage of this nascent re-recovery.

What happened to the recovery?

The not-good-enough recovery will get better

If you're like most people, you're downright peeved at the state of things: A recent Newsweek/Daily Beast poll found that 81% of people say the economy is not delivering enough jobs. People are angry at the corporations, the rich, the government, gas prices and their "personal economic situation." Marriages are under pressure. People are losing sleep. There's a lot of nervousness out there.

The good news is that the outlook is improving.

For one, the short-term negative catalysts -- such as auto production shutdowns because of a lack of parts from Japan and a spike in gas prices -- are beginning to fade.

The Japanese are bouncing back, with the Markit/JMMA Japan Manufacturing Purchasing Managers Index a rare bright spot after jumping to 51.3 in May from 45.7 in April, which was the lowest since April 2009. (Any reading over 50 indicates month-over-month growth.) The output component of the index jumped to 51.5 from 35, the biggest gain since the data was first collected back in 2001. Only 24% of respondents noted longer lead times from Japanese suppliers, down from 55% the month before. And the new order component jumped 12 points, the best result since April 2009.

Because of this, U.S. auto production is poised for a big increase in the third quarter, according to newly released factory schedules from Ward's, an industry data provider. Output dropped to just 8.1 million units on a seasonally adjusted annual rate -- down from around 9 million in February. UBS economists estimate this output drop will slow GDP growth in the second quarter by 1%.

But over the next few months output is expected to average a 9.6 million annual rate, the sixth-largest production jump on record. That should be enough to add 1.25% to GDP growth in the third quarter, according to UBS. Toyota Motor (TM, news) has already announced that it intends to be back at full production by August.

And what do those numbers mean? Well, the surge in auto production back in 2009 -- as dealers restocked inventory in response to the cash-for-clunkers auto rebate program -- "helped lead us out of the Great Recession," in the words of Credit Suisse economist Neal Soss.

Relief at the pump

Gasoline prices have also cooled from their highs after crude oil dropped from its peak of nearly $114 a barrel in late April to trade below $100 earlier this week. According to Deutsche Bank economist Joseph LaVorgna, the 12.3% drop should translate into pump prices near $3.41 a gallon, compared with the $3.97 national average reported last month. That was dangerously close to LaVorgna's $4 a gallon economic tipping point -- a dangerous price level I warned of back in March.

Every 1-cent decline in gas prices adds about $1 billion to consumer spending on everything other than energy. So a 50-cent drop in gas prices early this summer would be a significant boost to the economy by keeping a big chunk of change in shoppers' wallets.

What's more, the decline in energy prices is likely to continue.

While the Oil Producing and Exporting Companies failed to agree on raising output quotas at a meeting this week, Saudi Arabia is reportedly preparing to increase oil production to the highest levels since the summer of 2008. Crude prices have stopped rising based on the dollar's problems, meaning that the market is moving on supply and demand rather than on the whims of currency traders. The fact that there's no oil shortage suggests lower prices. The energy futures market is indicating a gradual drop in prices.

Pay me, baby

Of course, you can talk about auto production and gas prices all day long, but jobs are what matter most to people.

For one, recent economic reports, such as the poor one last week from the Institute for Supply Manufacturing report still had a healthy employment component, suggesting the current slowdown isn't pulling down the job market. Clearly, managers view this soft spot as temporary.

And despite a recent increase in the unemployment rate and a slowdown in the pace of hiring, labor income continues to rise. More workers are working longer hours at higher wages, boosting overall labor income at a pace that's well above the rate of inflation. Hours worked over the first quarter rose at a strong 3.7% annual pace -- the best growth rate of the recovery to date.

I've used the product of hourly wages and aggregate work hours as a proxy for income in the chart above. Combined with higher household net worth and an easing of credit standards, these income gains should boost spending in the coming months -- setting the stage for a strong back-to-school shopping season. This should juice growth in the second half of the year; reluctant consumers provided a drag on first-half growth.

Over the horizon, hiring should get a boost from a combination of higher demand -- thanks to the rise in consumer spending I'm looking for -- and a slowdown in labor productivity. We've already seen a steady decline in output per worker as well as increased labor costs (higher wages). This is typical for this stage of the business cycle, and it's key to unlocking corporate hiring plans.

You see, in the midst of a recession and in the early stages of a recovery, employers have power over workers scared of losing their jobs. Many employees are sacked. Workers who remain have to take on extra work. At first, it's easier to pay them overtime than to hire and train new workers. Thus, productivity shows a big boost as the workers who still have jobs put their noses to the grindstone.

Eventually, economic activity reaches a point at which existing workers simply can't handle the increased load. New workers are hired. They are less efficient, and maybe not as smart or experienced. The fear of unemployment begins to fade for everyone -- maybe they add a few minutes to the coffee break, maybe they leave on time instead of waiting until the boss leaves, maybe they use up all their vacation days. Maybe they use up all their vacation days. All of these factors push down productivity. The more it drops, the more employers are forced to bring on new workers to keep expanding production and growing their business.

We're reaching that point now.

Digging into the numbers, Harris finds that employment in industries with above-average hourly earnings have finally started to outpace earnings in low-wage industries. This is a sign that the recovery is starting to gain traction and create a need for more high-skill, high-pay career-type jobs. As a result, growth in high-paying jobs is outpacing growth in low-wage jobs in a sustained way for the first time in three years.

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Mail"},"omniAccount":"MSNPORTALSCP","ratingsControlId":"ratCntrlBinary","ratingsItemId":"scp:bbcdiscussion:da156fa5-f554-48d2-8639-c0d1ad1c7480","appUri":"http://social.msn.com/boards","pageUrl":"http://money.msn.com/exchange-traded-fund/the-economy-is-recovering-really-mirhaydari.aspx","ratingTags":["00120065-0000-0000-0000-000000000000","00000065-02a6-0000-0000-000000000000","ART"],"fblkShow":true,"fblkAppId":"","fblkRef":"","fblkTrkName":"","fblkTrkVal":"","twtShow":false,"twtTrkName":"","twtTrkVal":""}); }); /**/ 29CommentsNewestOldestBestWorstControversial12 AK 5726 minutes agoMaybe the DEPRESSION is over for Washington D.C. since they do take the $$$ from all the rest of us! Otherwise Oduma wake up, STOP spending our $$$ on pointless wars that you do not even finish! 2 0ReportSpamutahbill50 minutes agobull,bull,and more bull.spoken again by someone who lives life from a desk. 3 0ReportSpamChris Kurz (SSG K) 57 minutes agoAnthony Wiener was hacked--------really 1 1ReportSpamChris Kurz (SSG K) 1 hour ago

So we can blame, Japans crisis, weather, gas prices and spending cuts, but refuse to blame any of this administrations failed policies?

I think that these failures by our current leadership contribute far more to our horrible economy than weather or spending cuts, yet you will never hear a reporter bring up such an issue. Instead we get excuses as opposed to evaluating the problem and pushing for a reasonable cure.

For two years now we have been told the we are seeing signs that the recovery is starting to gain traction, only to see an "unexpectedly bad" jobs or earning report and then hear about how we need to spend more money to get out of our hole.

It seems in these morons eyes you have to dig a DEEPER HOLE in order to get out of the hole we are already in........

6 2ReportSpamgoldbug091 hour ago

The economy is not recovering.And as long as banks can go to the Fed and get trillions of dollars whenever they need it,we will continue to incur unimaginable amounts of debt.

Consider these 3 FACTS:

Half of all Americans now earn less than $30,000/yr

Housing prices continue to decline-even with the Bernank doing everything he can to keep prices propped up.The inviolable law of supply and demand will always win out.Individuals working for low wages CANNOT afford a $200,000 mortgage.Or as Peter Schiff said,"A home is only worth what the current buyer can afford not what the last buyer paid."

The OTC derivatives market is worth $1.5 quadrillion.YES,QUADRILLION!!How is this even remotely possible?Global GDP is $60 trillion/yr.This is the greatest financial crime in the histroy of the world and nobody in Washington seems to care.

How long must savers have to tolerate near zero interest rates?It's been 3 years now.

If the economy is indeed recovering,shouldn't we be talking about raising interest rates?And now,as if right on cue,whispers are already starting about QE3 because,obviously,ole Ben can't let his buddies on Wall Street down.Yeah,some recovery.

Something wicked this way comes.Believe the mainstream media propaganda at your own peril.Please learn to think for yourself.

10 2ReportSpamBrian HOUGH1 hour agoRemernber Bagdad Bob?....the military mouth piece (propagandist) for the Saddam regime who tried to convince that the marines were not just down the street and ready to enter the city, but were instead on the verge of defeat. Well, here's your new Bob....only it's Anthony trying to peddle his recs (unpaid I'm sure) and sell his online service with lolly pop news of the good ole days are just around the corner folks.....listen to Peter Shiff and get an education for God's sake! 9 2ReportSpamCommonCentsInWY1 hour ago

Folks are BROKE everywhere. You name the place?

Walmart is building Convenience type stores now.

Walmart Express. Whata joke? Thye PAY peanuts wages and you cant afford the Healthcare.

Thats why we "needed" an affordable Healthcare plan.

The only jobs left are MacDonuls and Walmarts. Yee Haa!

Its better to be on Programs. Just do the simple math!

5 1ReportSpamBob (All Good For Me) 1 hour agojust another page of twist and turn... 5 0ReportSpamBrian F2 hours agoWait were we not recovered in July of 2009? At least that is what I was told. This garbage doesn't fool the people anymore. Try honesty! 11 3ReportSpamkabayan2 hours agoManufacturers do not have the capital to resume full production,not to mention keep up spare parts inventory IF another disaster happen 3 1ReportSpamHify Hify2 hours ago

Based upon all the comments below, my own "Poll" of Americans is that 99% of them don't think the economy is getting better. Based upon that information tied with the economic index of theoritical analysts analyzing the economic indexes following the percentage of growth of the GNP tied to the index of unemployement falling because the unemployement extensions are ending and the unemployed not receiving unemployment are not counted in the unemployment index along with the self employed that never could file for unemployment (.... pheewwwwwww breath) it seems to me that the answer may be because nothing is getting better? and the Government is afraid when everyone agree's upon this fact they may actually need to be afraid of the common gun toting citizen?. Hmmmm Naahhhh , bring the military home to protect the government.

11 2ReportSpamBruce B2 hours agoLets sum this up Gas is up All food costs are up Stress levels are way up Costs of nearly everything in sight is up On the flip side My pay is way down Savings is nearly non existent My hair is way down nearly non existent My health is way down Home value is way down Employment is non existent Ok does anyone see a pattern here? Ok the better question is, does anyone want to start a "march"? How about a H E L L YA from some fellow americans? 15 1ReportSpamIrishbloody2 hours agoFirst time I agree with you Anthony, this economy is rolling again, Reps can't stop it, the snowball is in movement! 5 15ReportSpamGRIM REAPER 902 hours agowhat ****ing planet are you from,mirhaydari, we will never see $3.41 a gallon gas ever again. before all this **** of raising the prices for no apparent reason started a few months back, gas in new york was at appx $3.86 a gallon. a few weeks ago it was forecast to drop CONSIDERABLY by memorial day. where is the drop? goldman sachs and crew conveniently predicts 130 dollar a barrell oil by the end of the year 2 weeks ago,successfully artificially pumping up the price.greece worries,libya worries, in 3 weeks it will be hurricane worries will affect supplies.always a created excuse to KEEP THE PRICE HIGH.But you can laugh all the way to the bank for what you got paid for this useless prediction.go back to wherever it is you were ejected from 7 5ReportSpamSomeone2 hours agoyou dont know **** all you guys trying to tell me about 2 1ReportSpamDerek Vance (DerekinFlorida) 3 hours ago

Any sort of insinuation that the economy is on the right track is just plain homerism for Obama. This administration have done nothing but throw money at the issues and expect them to go away. There was a $760 BILLION Dollar stimulus injected into this economy not even two full years ago. Now, one of two things are true about that...

1. The choices made with the money were horrible and there has been no real return on the investment, as soon as the stimulus money dries up... so will the growth.

2. The money was not spent on what this Administration claimed it to be spent on. Obama made promise after promise in his Liberal Media subsidized and protected election campaign that he would have a "Transparent Presidency and Governmental system"... Pure crap.

Big Government and Liberal spending have us not only going the wrong way... But it has now placed us in very real danger of economic collapse. And I'll be perfectly honest... I feel that was Obama's goal from the start.

16 5ReportSpamMCIAHEL4 hours agoi know i am not saving 50 cents at the pump, i live in ct. maybe 30 in some places but still 30 cents higher than most states. and to tell you the truth, i sure the hell am not spending what i save at the pump. no way no how, i'll hold on to it for the next time, damn next time is here already because opec said screw ya. and already went up over 100 bucks a barrel. so don't spend your savings folks the government wants your bucks bad. 8 1ReportSpamjohnny5224 hours agoThe government is trying to fool someone!!! 17 2ReportSpamVerbalHarpoon4 hours ago

Obviously the author is reading from a White House email. I see fuel prices remaining current,dropping a few cents..maybe. Japan is nowhere near ready for full production,let alone a comprehensive QA plan (don't forget,they make the tooling the manufacturers need to check QA),nor has any importer made plans to be prepared for another disaster. Manufacturers do not have the capital to resume full production,not to mention keep up spare parts inventory IF another disaster happens. Japans money is tied up in keeping their market afloat,the US will probably have a run on its banks by Japans corporate looking for cash to keep their jobs,help rebuild cities,feed & clothe its people. Not to mention,Japan pumped some 3 trillion into its market in the first week of the tsunami,their infrastructure is critically wounded. The strain just to clear the debris and support its people will surpass what the survivors of Hiroshima went through.

9 4ReportSpamG-Man19604 hours agoWithout absolutely NO help from the republican/teabag parties. After winning the 2010 elections based on their promise that job creation would be their number one priority, we still have not even heard a peep from the republican congress about a jobs bill - nothing. Especially after they held the country hostage in order to continue Jr.'s tax breaks for the wealthy justifying it by saying that the wealthy were the ones who would create jobs. Hey republicans WHERE ARE THE JOBS??? I guess they're still concentrating on their war with middle class America and shredding the Constitution to confetti. And sadly it looks like Americas middle