Are We Headed For A Recession?

By Eric Fox | October 12, 2011 AAA

The stock market may be convinced that another recession is inevitable, but the evidence from recent economic reports, issued by the government and private groups, does not support this conclusion.
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Job Growth
The United States economy is still creating jobs, albeit at a sluggish rate. The Bureau of Labor Statistics reported that the economy created 103,000 nonfarm payroll jobs in September 2011. The report also substantially revised upward the nonfarm payroll employment reports for the previous two months, moving July from 85,000 to 127,000 and August from zero to 57,000.

A similar report on employment issued by ADP Employer Services, also indicated job growth in the United States, with 91,000 jobs created in September 2011. Unemployment is also a lagging indicator so it is possible that recessionary conditions have not yet shown up, in this indicator. (For related reading, see Using Coincident And Lagging Indicators.)

This doesn't mean that every industry or company was hiring in September. Bank of America (NYSE:BAC) moved the other direction and announced that the bank would fire 30,000 employees, over the next few years. This is part of the company's plan to cut costs by $5 billion. These layoffs have been on-going all during the year. Merck (NYSE:MRK) announced in July 2011 that the company would fire approximately 12,000 to 13,000 employees. It is speculated that as much as 40% of these cuts would be in the United States.

Institute for Supply Management
The Institute for Supply Management reported that economic activity in the non-manufacturing sector increased in September 2011, although at a slower rate than August 2011. The index was at 53 and was the twenty second consecutive month of growth. The Business Activity and New Orders Index both increased from the previous month, while the Employment Index declined. The Institute for Supply Management also reported that economic activity in the manufacturing sector expanded, as well, in September 2011, with the index at 51.2. This was the twenty sixth consecutive month of growth in the U.S. manufacturing sector.

Leading Index
The Leading Economic Index also indicated positive economic growth with the index moving to 116.2 in August 2011, up by 0.3% from the previous month. The Conference Board did note that expectations and confidence fell and that the odds of a recession have "certainly increased in recent months."

Not every public company might share this positive view of the economy, as a number have reduced earnings guidance, due to weak demand. Ingersoll Rand (NYSE:IR) cut guidance on earnings per share from continuing operations, to a range from 77 cents to 80 cents per share, down from the previous level of 85 cents to 95 cents per share. The company cited weak demand in North American residential and commercial security markets.

Cooper Industries (NYSE:CBE) also cut guidance for the third quarter on earnings per share, citing soft demand in residential and commercial businesses during the quarter. The company also experienced weakness in the electronics business.

The Bottom Line
Investors that want to wager that a recession is not on the way, and feel that the recent sell off in the stock market is illegitimate, might want to consider a broad based exchange traded fund (ETF) such as the Vanguard Total Stock Market ETF (NYSE:VTI). This ETF tracks almost the entire U.S. market through the ownership of 3,000 different securities. (For related reading on ETF, see An Inside Look At ETF Construction.)

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