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Bob’s View: Spring Forward

By Bob Landaas

After a recent string of stock market declines and disappointing economic reports, it’s wise to put the daily news in a longer-term perspective.

Analysts are now looking for GDP to be at 2.3% for the second quarter, which ends at the end of June. That’s up from 1.9% in the first quarter. And encouragingly, the latest forecast is for 3.2% growth in the third quarter of this year, edging closer to the long-term normal growth rate of 3.3% that we have averaged since 1947.

Many of the setbacks that we have experienced this spring are temporary factors, which would allow the economy – and ultimately the markets – to move higher in the fall.

  • Energy prices appear to have topped out.
  • Japan is in fact recovering from the March 11 earthquake and the tsunami which followed. Those disasters caused severe supply chain disruptions affecting manufacturing not only in Japan but also in the United States.
  • And the weather is normalizing after a very difficult spring that caused significant flooding in America’s heartland and delayed the spring planting and caused corn and wheat futures to skyrocket, adding to higher food prices.

My biggest worry at this point is about the lack of job creation. The latest forecasts call for 2.3 million jobs being created over the next year, which would cause the unemployment rate to drop just slightly.

That’s quite a bit better than the pattern of 100,000 new jobs a month that we saw earlier this year. Many economists feel that we need to create at least 125,000 new jobs a month just to keep up with population trends.

As we have known for some time, recoveries from financial crises tend to be weak and long-lasting. It should come as no surprise that we’re experiencing similar patterns now.

I was encouraged when the Federal Reserve’s Beige Book, which looks at regional economic conditions, was guardedly optimistic at a time when the markets were selling off. It shows me that the consumer is still out there spending, that housing and jobs are in a mess. But the fact that the economy is doing fairly well – not great, but enough to stay out of a recession – tells me that better times will be ahead.

Predicting stock prices is difficult but normally involves forecasting earnings and interest rates.

The latest earnings estimate, according to Bloomberg Financial Network, is for the S&P 500 to earn $99.08 this year, which is a 17% increase year-over-year from 2010. Next year, analysts expect those earnings to grow by 14%

The Chicago futures market currently favors a Fed interest rate increase in the summer of 2012. So with earnings relatively strong and interest rates low by historic standards, stocks will ultimately resume their upward march.

Bob Landaas is president of Landaas & Company.

initially posted June 21, 2011, updated June 24, 2011 

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