Early signs of recovery: a show of hands please

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Print this page by Bernie Niemeier

The Dow Jones Industrial Average rang in the New Year with a close of 11,670.8, its highest close in 28 months.  Overall, the DJIA climbed 11 percent in 2010, the S&P 500 rose 13 percent, and the Nasdaq was up 17 percent.  Not a bad start for the New Year and not a bad end to 2010, a year which many continue to associate with losses rather than gains.

Also ringing in the New Year was an announcement by Goldman Sachs that it would put $450 million into Facebook as part of a $500 million private investment fund.  This put the value of the social-networking site at an estimated $50 billion.  Large public companies in that range include Altria and Boeing.

This kind of valuation for an Internet-based business reminds me of the heady days, a couple of recessions ago, before the dot-com bubble burst.  But make no mistake; Goldman is almost always holding the smart money.  Remember this is the company that bet on both sides of the mortgage market, turning in record profits even as the housing market collapsed.

An interesting side note to the Facebook investment is that it delays the need for an IPO.  Two thoughts come to mind here.  One is that delaying an IPO until the market is stronger will yield better results.  The second is that increased regulation and public scrutiny have added significantly to the cost of going public, making the private capital markets more attractive.

This result is at odds with the desired effect of regulation to make public companies more transparent and accountable to all investors.  As the Facebook example shows, there is a fair amount of private money looking for the right investment.  Companies may now consider staying private longer as a better option than going public.

Nevertheless, the domestic IPO market is making a comeback.  According to Dow Jones VentureSource, there were 46 venture-backed IPOs of U.S. companies in 2010, compared with only seven and eight in the two previous years. 2010 was the best year for deal making since 2007.

There have been a number of additional positive economic signs. Beginning in the second half of last year many bellwether corporations began to report higher earnings.  Also, according to the Institute for Supply Management, U.S. manufacturing activity capped 17 months of consecutive increases at the end of last year.

The Bureau of Labor Statistics shows unemployment decreasing.  Internationally, Chinese central-bank efforts to curtail inflationary trends point toward the return of the Asian consumer economy as a growth driver for the U.S. export market.
In short, there is an abundance of good news for those inclined to see the glass as half full. 

A return to growth in the stock market is a key indicator.  The access to capital created by a healthy IPO market is important, but paper-wealth creation on Wall Street is perhaps even more important.  Both consumer spending and business spending are rooted in the psychology of the decision maker.

When 401(k) plans and diminished stock portfolios show that retirement might not look possible, it becomes easy to postpone consumer purchases or additional business cost.  After all, fixed cost is a form of business risk.  With Wall Street now showing its best growth in over two years, 2011 offers the best chance in awhile to get over the “delay and pray” mindset that has been holding back business growth.

Given Virginia’s above average personal and business demographics, a return to growth on a national and global basis means even better results for the commonwealth.

Christine Chmura, a leading Virginia-based economist, has opened several of her recent presentations with a question, “Who thinks the recession is over?”  This parlor trick invariably shows only a few hands raised.  Of course, the surprise answer for many in the audience is that the recession technically ended in June 2009.  Now that we are in 2011, I hope to see more hands being raised.

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