Subtle signs show that economic recovery has begun, expert says

As volatile as it is, the investment sector of the gross domestic product (GDP) is the driving force behind the nation’s economic recovery, according to Tim Miller, Invesco Funds Group chief investment officer.

Miller addressed the 14th annual Economic Forum at the Thousand Oaks Civic Center last Thursday night.

Using charts and facts gathered for his firm, Miller discussed the trends in investments, consumption, government purchases and exports.

"This was a very unusual recession," he said, "in that the consumer—for the most part—has held together pretty well as lower interest rates (and) mortgage refinancing have provided for a very solid foundation for consumer health. The consumer sector has not been the cause of the problem in the economy."

Miller said that while he sees broad-based signs of economic recovery, it’s hard to pinpoint its strength.

"The variables now are pointing toward recovery," he said, "So, we’re fairly confident that the economy is going to recover."

Joining Miller in making presentations during the forum were John Grace, Investors Advantage Corp. president, whose organization sponsored the event, and Bradley Sicoff, Manulife Financial’s regional vice president.

Earnings are in a recovery mode, Miller said, adding that there’s daily evidence of it.

And he was optimistic about other factors.

"There is a lot of cash on the sidelines. We still have very good long-term demographics trends for investments."

Regarding the stock market, he said that "to stack up all the cards, they are certainly in favor of a better market over the next year few years. It’s a dangerous thing to forecast, but this is what we use in determining how aggressive we are going to get with our funds—how we’re going to position what types of companies we want to invest in."

The featured speaker pointed out that in 2001 consumption was 70 percent of the GDP, government purchases were 18 percent, investment was 16 percent and exports were a minus 4 percent.

"The problems have been in the investment sector," Miller said. "At the margin it is only 16 percent of the GDP, but when it swings, it was enough of a swing to pull us into a recession."

At the core, he said, was the "slowdown in corporate spending (and) a lot of that had to do with the excesses of the 1990s when we had Y2K—a lot of spending to get prepared for Y2K transitioning all the computers."

In addition, Miller said there were problems associated with the Internet. The stock market, he said, fueled many enterprises that lacked the standards of sound businesses.

"The market was getting over-exuberant about the potential for all these Internet-related companies. They went public. Their stocks went up. They generated a lot of capital and they spent a lot of that capital.

"So, we had some unusual factors, I think, that drove an excess of spending in the economy by the corporate sector in the late 1990s. That is what we are unwinding right now. And that is what primarily has caused the profit recession in the stock market."

In today’s economy, Miller said, companies are allowed to fail and firms that don’t have a sound business model fail miserably. It has social implications, he said, but it also cleanses the system.

"That’s the process we’re going through right now," Millers said. "Spending by the businesses has been very subdued for the past few years."

Signs of improvement are sluggish, he said, but they’re also providing some encouragement that the nation is working itself out of the profit- and stock market- slowdown.

Referring to the tax proposal by the Bush administration, Miller said that it’s not just for consumers; it also gives incentives for businesses to start spending again.

"Many businesses are constrained or aren’t doing the necessary spending to continue to run their business," he said. "That can only go on for so long. That’s been in place for a few years now, so I think we are starting to see that companies realize they have to continue to spend to run their business."

Companies will probably get some tax incentives, he said, to encourage spending.

"When that takes place, combined with a reasonably healthy consumer, it will pull us out of this slowdown," Miller said. "The federal government, the deficit we’re in right now is on a cyclical basis. It’s a good thing because it also helps encourage a rebound for the economy to recover."