It's clear that the economy is recovering at a much slower pace
than previously thought. A few key sectors of the economy are
preventing a quick recovery. The first, and probably the most
important, is the labor market. In Ben Bernanke's late August
update on the state of the US economy he had this to say about the
" Incoming data on the labor market have remained
disappointing. Private-sector employment has grown only
A recent report from the Labor Department stated that the
private sector added 67,000 jobs in August, up from the 40,000
economists had previously estimated.
Although this seems like good news, the number was more than
offset by the loss of 121,000 government jobs in the same month. In
all, the U.S. lost around 54,000 jobs in August. The US hired a
large amount of Census workers, which only helped the labor market
for a short period of time.
Private-sector hiring is essential to drive the unemployment
rate lower, but this increase in private-sector jobs is being
offset by the large number of people leaving the labor force.
If this continues for an extended period of time, some experts
believe that the unemployment rate will creep up to 10 percent and
stabilize at that level. The problem is that the pace of hiring is
extremely slow. Until private hiring accelerates to an appropriate
level, consumer spending and lending will remain at depressed
levels and could hamper the economic recovery.
The Fed is aware of the problem and may have to supply
additional monetary stimulus when needed. Its actions in coming
months should be a key indicator of how fast the economy is
***The second biggest factor affecting the recovery is the
structural problem within the small business sector. According to
the experts, small business share of GDP remained constant around
50 percent of GDP from 1998 to 2004.
With this much weight on this single sector alone, a sustained
recovery is unlikely until small businesses are able to grow at
Not only will small businesses contribute directly to overall
growth, but the strengthening of this sector will lead to increased
hiring, which should in tern lead to increased spending into other
areas of the economy. Bottom line - a healthy recovery is unlikely
without a strengthening and more active role by small
To find the best small companies that can lead the economic
recovery I like small cap tech. To find my best picks in this
***Lastly, an improvement in the US housing market is needed for
a more sustained recovery in the economy. In the Fed's meeting in
late August, Bernanke said,
Home sales dropped sharply following the recent expiration of
the homebuyers' tax credit. Going forward, improved
affordability--the result of lower house prices and record-low
mortgage rates--should boost the demand for housing".
Remember, around 1 in 10 people are without a job and about 2 in
10 are worried about losing their current job. With such great
uncertainty right now, I can see the housing market recovering at a
slow pace for quite some time.
The Fed can only encourage so much expansion and lending. But in
the end, I think it's going to take some time for all the pieces of
the puzzle to fit together until we have strong and steady
Now what does this mean for you and your future investments?
Pay close attention to economic data and/or any decision the Fed
makes, as these decisions will continuously indicate the strength
of the economy. Remember, the economy is recovering - but at an
extremely slow pace.
One potential investment opportunity for when interest rates are
at an all-time low and the economy is in early stages of a recovery
are Real Estate Investment Trusts (REITs).
The chart below shows the performance of the
Vanguard REIT Index ETF (
versus the S&P 500. Year-to-date, the REIT index has returned
20 percent while the S&P 500 has had a negative return of 4
Now you can invest in an index, but I prefer stocks. One
small-cap play is
Developers Diversified Realty C (
, which owns and leases shopping centers and malls and operates as
an REIT in the US.
The company has a market cap of $2.9 billion and is up 24
percent year-to-date. With interest rates at record lows and the
economy on the path to recovery, I like this company and REITs over
the next few quarters. They are risky however as cash flows are not
of the highest quality right now. As always, I encourage you to do
your own homework on any stock you're considering.