Economic Growth Setting Up to Disappoint Investors?

By Sasha Cekerevac

Two of the most frustrating aspects over the last few years have been the anemic level of economic growth and the below optimal amount of job creation.

Even though the stock market is hitting all-time highs, millions of people do not feel wealthier because of the uncertainty regarding job creation. Even for those who might have a job, because the employment market is so fragile, many people are afraid of losing their positions, knowing that there are millions of others who are gladly willing to take their places.

Recent data regarding the true level of economic growth remain mixed. While there are some signs of a possible improvement, conversely, there is just as much information throwing doubts about the future levels of economic growth and job creation.

Recently, the Institute for Supply Management (ISM) released its national Purchasing Managers’ Index (PMI) for May 2013, which came in at 49%. This reading is for the entire nation, and not just one region. (Source: “May 2013 Manufacturing ISM Report on Business,” Institute for Supply Management web site, June 3, 2013, last accessed June 4, 2013.)

The report indicates that economic growth is stagnating, with manufacturing contracting for the month of May, the first time this sector has done so since November of 2012. The PMI dropped a substantial 1.7% from last month’s reading.

Not only is it significant that the PMI dropped by such a large amount, but this current reading is the lowest since June 2009, and we all know how weak economic growth and job creation were during that period of time.

Looking at the internals of this report, the New Orders Index segments dropped a very large 3.5%, with the Production Index dropping 4.9%—both drops hit below the all-important level of 50. (A reading above 50 signals growth; a reading below 50 signals contraction.) The Employment Index was essentially flat, yet it did maintain a reading just above 50.

I think the following comment from a respondent in the ISM report best captures the current state of economic growth: “General economy seems sluggish and pensive. Buyers are not buying much beyond lead times.” (Source: Ibid.)

There is uncertainty, which is keeping job creation at minimal levels. No sane business owner would start to hire en masse unless they were certain that economic growth will accelerate.

Because the economy remains on the edge of slipping back into a recession, this is leading many businesses to hold back. And like a domino, if one business owner holds back slightly, this inaction goes down the chain and the next business owners follow suit.

Economic growth can only accelerate once there is less uncertainty in the economy. Only in this situation can job creation begin to accelerate to more acceptable levels. As we’ve recently witnessed, Washington politicians are making a huge mistake by not taking action. With so many unknowns that might occur over the next year or two, I fear that political inaction is serving as an anchor on job creation and economic growth.

This article Economic Growth Setting Up to Disappoint Investors?  was originally published at Investment Contrarians