Consumer Demand’s the Only Answer; So Where’s it Going to Come From?

by Mitchell Clark, B. Comm.

With second-quarter earnings season winding down, I think equity investors are in for a strained period over the next couple of months. When companies aren’t reporting, all the market can do is trade on economic news, and this news still isn’t good enough.

Of course, we’ve had a great run since March. In fact, we’ve had a very good bounce since the middle of July, so a period of consolidation is a healthy development for the broader market.

I’ve written before about how odd the recovery in the main stock market indices has been, with the DJIA virtually mirroring itself over the last year. If this odd trend were to play out, we should experience a stock market consolidation for a little while longer, and then experience a new upward leg in stock prices. What I know for certain is that anything is possible these days.

The price of a barrel of oil still amazes me and speculators must be trading the commodity with future inflation in mind. The data show that we’re awash in oil, yet prices still seem to be sticking around the $70.00-per-barrel level. If GDP data tick higher among the biggest global economies, $100.00 a barrel seems like an easy target.

Recent numbers on wholesale prices show that inflation is very well-contained right now and this will give the Fed a lot more time to keep interest rates at current levels. In fact, the central bank has already said that it wants to keep rates at record lows for an extended period of time. I do take the central bank at its word about this, because, even if we get economic growth in future quarters, it’s almost all due to government spending. The stimulus money will eventually run out.

Still, some economists are predicting that the central bank will start raising rates in the second half of next year and right through 2011. Even if this does happen, this level of rates should be manageable for any household or business to manage.

What’s needed for any sustainable growth in the economy is demand-led consumer spending, and this might take a long time to recover. After the credit crunch and subsequent financial crisis, a lot of individual consumers changed their spending behavior. Many retailers have now said that this change in behavior has been so substantial that they don’t expect their operations to recover to previous levels for years to come.

There is a hopeful future in the economic landscape, however, and in my view it rests with the green economy. Even GM is opening a new plant in Michigan to build its new batteries for the “Volt.” This is where government stimulus spending and incentives will be best applied over the coming years. Consumer-led demand is something that isn’t easy to create. It has to be nurtured and encouraged by all the forces in the economy. Only with innovation on the part of entrepreneurs and government can we get a burgeoning economy once again.