It Was Just A Flesh Wound

“It was just a flesh wound”. For those of you not Monty Python fans, this quote was uttered by the Dark Knight after losing both arms in a sword fight and is an apt description of our economy for the past 24 months. This recession has been longer and deeper than any since the great depression testing the metal of CEOs, who were forced to make tough personnel and spending decisions to preserve cash flow. Fortunately, we believe those painful decisions are in the rear view mirror and management teams can once again focus on top line growth.

Throughout 2010 and into 2011 we expect improving macro economic conditions which will be tempered somewhat by restrained consumer spending and a cloudy employment picture. Although economic conditions are improving, it is instructive to remember from December 2007 through December 2009, the U.S. Economy shed approximately 7.4 million jobs and the current real unemployment rate, after including 3.7 million-plus people who are reluctantly working only part time, remains approximately 16%. However, the addition of approximately 220,000 non census related jobs in March and historical post recession employment trends provide reasons for optimism.

Additionally, most economists are opining the worst appears behind us, as evidenced by leading indicators such as the Purchasing Managers Index which reached 60.4 in April, 2010, the highest reading since the start of the recession in December 2007. This was the ninth straight month the PMI exceeded 50 (Note: A reading above 50 indicates the manufacturing economy is generally expanding; below 50 indicates it is generally contracting).

In general, most manufacturing companies, including our portfolio, are experiencing improving sales, bookings and quote activity compared to prior year and the prior quarter, which bodes well for the rest of the year.

Is anyone else concerned US political leadership is spending us into the same financial crisis facing Greece?

The possibility of sovereign debt default used to be the domain of poor Eastern European, African and Latin American countries, seemingly in constant need of bailout from the IMF and developed countries. Now we are seeing the Greek financial crisis exploding before our eyes. Their problems stem in large measure from overly generous government sponsored entitlement programs, such as pension plans which provide early retirement (50 years old for women and 55 years old for men) for a myriad of “hazardous” job classifications including, insert laugh track here, radio and television personalities and musicians. Their crushing pension liabilities, when added to current deficit spending, approximate 875% of GDP[1]. Ludicrous numbers to be sure, but before we become too smug this could not happen here, consider estimates for US federal government debt, after incorporating Medicare, Medicaid, Social Security and other similar entitlement obligations, is $79 trillion, or about 500 percent of GDP1. Additionally, federal government employee benefits are not reasonable or sustainable. I personally know of one extended family member, a hard working, diligent public sector employee, who retired at age 52 with full medical coverage and 80% of his average last three years salary guaranteed for life. This does not even begin to consider the impact of significantly under funded state police, fire, teachers and public employee pension funds. If we don’t elect political leaders with the courage to tackle these overly generous entitlement programs it won’t be long before the US will be suffocating under federal and state debt burdens. The Obama administration’s first year deficit, estimated to be $1.7 trillion, the largest in U.S. history, and his sponsorship of a massive health care spending bill are not an encouraging omens.

[1] J. Gokhale, an economist at the Cato Institute