Optimism May Be Based On Hope, But Hope Does Not Fuel A Recovery

Economists and stock holders were overjoyed by numbers from The Conference Board showing that its confidence index rose to 54.9 in May from 40.8 in April. The fact that the number is still very low did not undercut the optimism that the announcement brought with it.

Dan Greenhaus of Miller Tabak had a more measured reaction, telling MarketWatch: “Of course, whether better days materialize or not remains to be seen.”

Optimism is fragile and what is fragile may disappear as quickly as it came. Most of the Conference Board index improvement appears to have been based on the perception that the pace at which unemployment has been rising is slowing. There is plenty of evidence to the contrary.

Corporate profits are still at multi-decade lows and many analysts estimates are that they will not recover in the current quarter and, in some industries, they may not recover at all until 2010. When sales are falling, the only way to boost earnings or lessen losses it to cut expenses. That means people at most firms layoffs are going to rise if the recession keep pressure on corporate sales.

The government hoped that the fruits of the stimulus package would begin to hit the economy by now. The investment in project for building highways and bridges, schools and parks, and infrastructure for broadband and alternative energy should be producing tens of thousand of jobs. The actual sum of stimulus money from the new government program that has reached businesses is currently estimated at only 6%. Job creation is not likely to be a by-product of federal spending if that number does not rise sharply.

The financial situations of states and municipalities is getting worse. No one needs to look beyond California to see that. If the federal government cannot support plans to fund or erase budget deficits in the most hard hit states particularly those in the Midwest, municipal workers will begin to lose jobs and that will add considerably to the level of unemployment.

The restructurings to the auto and financial industries are not over. Auto supply companies are still under pressure to cut costs and workers. The insurance sector may be about to go through a substantial restructuring of its own. Airlines are facing more headwinds as customer demand drops and oil trades above $60. In other words, the hardest hit industries may have to restructure their restructurings.

Consumer confidence could be back down in June or July. There was really not much to support its rise in May.

Douglas A. McIntyre