- - Thursday, July 28, 2011


While many are glued to the television and the Internet waiting for the latest on the debt ceiling and deficit reduction talks, the manufacturing economy slowed further in June as evidenced by negative durable goods figures for the month. The Federal Reserve offered a weakening economic picture in its July Beige Book report, which showed a moderating pace of economic activity in many of the 12 Federal Reserve districts. This not only mirrors the gross domestic product (GDP) trends over the past few quarters — a weakening growth picture — but carries that picture of weakening growth into the second half of the year.

Meanwhile, the first half of corporate earnings season has been mixed — characterized by some companies delivering while others are not while more than a few cut their outlook for the balance of 2011. Siemens AG chief executive officer Peter Loescher summed it up well when he said this week that Siemens sees “a deceleration of the growth market around the world and also a lot of volatility.”

As we wind down the second quarter of 2011 earnings season and enter the dog days of summer, analysts and economists will no doubt be putting pencil to paper to revisit their economic projections for the second half of 2011.

In terms of being put under the microscope, weekly jobless claims fell to 398,000 for the week ending July 23, the first week below 400,000 since April. While some will see that as a positive sign, I see that drop as being only a temporary one.

Why only temporary?

There are a number of reasons that trace back to uncertainty, whether it be about the strength of the domestic economic recovery, European debt woes, the impact of whatever debt-ceiling and deficit deal brings. With that and more weighing on job creation, the reality is head count reductions are once again back in vogue. In recent weeks we have heard from the likes of Cisco, Goldman Sachs, Lockheed Martin and others.

As we marched toward the halfway point of corporate earnings season this week, we have additional job cut announcements from Research in Motion, HSBC, Credit Suisse, Boston Scientific, Callaway Golf and others as well as layoff announcements from a number of states and municipalities. Those include the state of Connecticut; the city of Memphis, Tenn.; Trenton, N.J.; and the Ohio Department of Rehabilitation and Correction to name a few.

The former reflects companies looking to right-size their structure while the latter reflects the need to close budget gaps. Regardless of which debt ceiling and deficit plan gets passed, one of the key components will be spending cuts and odds are that means even more layoffs. Need I mention the U.S. Postal Service is looking to close a number of locations?

With that as a backdrop, I don’t see a meaningful decrease in unemployment figures near term. It is rather likely that consumers will continue to see the economy as “getting worse” as recently reported by Gallup, which will restrain spending heading into the back to school season. According to the National Retail Federation (NRF), back to school spending is the second greatest driver of domestic retail sales behind the Christmas holiday season.

One of the key takeaways from the NRF’s 2011 Back to School survey is that 43.7 percent of respondents said “the economy is forcing them to spend less in general.” To me, that signals consumers will be more selective in their purchases to balance what they need versus what they want.

With a number of uncertainties in front of us, one suggestion for investors would be to re-examine those goods and services that are deemed inelastic and as such will be less affected by slower consumer spending. Wine, alcohol, chocolate and the like.

As we brace for the outcome of debt-ceiling and deficit reduction, any one of those might hit the spot — in moderation of course.

Stay tuned.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at [email protected] At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.



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