Join the Quest for Recovery Confirmation

We keep hearing that a recovery is underway. If we are to measure recovery strictly through the performance of the stock market, then green shoots must indeed be blossoming all around us. If recovery were characterized by things getting worse more slowly than before, then we could all breathe a sigh of relief. However, this Fool's ongoing quest for confirmation of recovery from among the productive sectors that traditionally drive sustainable economic growth has yet to bear any edible fruit.

Steel Dynamics (Nasdaq: STLD  ) provided a timely snapshot of the American steel industry last week. The company released fourth-quarter guidance for earnings of between $0.10 and $0.20 per share, leaving analysts once again errant to the upside with their expectation of $0.23 per share. Causes for a lean quarter had been identified by the company back in October, but the greater insight lies in the statement that even given today's persistently lethargic levels of steel demand, "sustainability remains a question mark."

Larger competitor Nucor (NYSE: NUE  ) confirmed a rather bleak assessment for the state of any "recovery" in a recent discussion with CEO Dan DiMicco:

Real or end-use demand has not improved to any significant extent over this period, and we do not expect any improvement anytime soon. The "stimulus" package has not worked.

Many Fools agree, with a full 94% of respondents in a related Motley Poll indicating a desire for a new strategy to get the economy moving again: one that focuses away from propping up impaired financial behemoths like Bank of America (NYSE: BAC  ) , and focuses instead upon investing in infrastructure and rebuilding America's industrial base. President Obama's latest stimulus initiative speaks to this need, but then again ... so did the previous one!

The real story in real estate
A number of signals from multiple sectors of the domestic and global economies continue to fly squarely in the face of claims that a recovery is well under way.

Back in June, I cautioned that a delayed wave of mortgage defaults continues to loom on the horizon, and loan modification programs may still be doing little more than delaying the inevitable. A record 3.9 million foreclosures are projected for 2009, with the gruesome tally growing higher still in 2010. According to one report, speculative grade debt issuers anticipate a 12-14% default rate by the end of 2009. In 2007, that rate was beneath 1%.The commercial real estate market looks to be the next shoe to drop, and the recent debt crisis in Dubai reminds attentive Fools that highly leveraged real estate markets around the world have additional unraveling yet to endure.

Before Fools go bargain-hunting this holiday season within the heavily impaired construction industry -- including downtrodden names like Toll Brothers (NYSE: TOL  ) and wallboard manufacturer USG (NYSE: USG  ) -- I recommend a long walk through your own community in search of anecdotal building activity. CAPS member GirlScoutDad sought reassurance from the Fool community through his blog Friday for an investment in commercial real estate REIT National Retail Properties (NYSE: NNN  ) . Given the brisk economic headwinds, and a commercial real estate unwinding event that I believe has yet to unfold, I believe that the CAPS community is spot-on in granting only one star out of five to a component of this impaired sector.

Whether or not one is invested in real estate or related sectors, this crucial segment of the economy bears watching by Fools awaiting confirmation of the recovery we keep hearing so much about. Then again, it's not that simple either. According to John Quigley, professor of economics at the University of California Berkeley: "You can't start to see improvement in the housing market until after unemployment peaks." Wait a minute ... I thought unemployment was supposed to be a lagging indicator! In this Fool's view, then, the timeliest of economic indicators remain the collective signals from the bellwethers: steelmakers, transports, equipment manufacturers, etc.

No ringing of the bells from bellwethers
For their part, domestic railroads are posting stronger year-over-year comparison numbers than they were a couple of months ago, but coal volumes continue to speak volumes, remaining more than 13% below prior-year levels. Meanwhile, the broader domestic measure of freight movements -- the Freight Transportation Services Index (TSI) -- incurred the largest year-over-year drop in October freight volumes in its entire 20-year historical record.

Looking to the world stage, we find that the Baltic Dry Index (BDI) has shaved 20% in less than a month, and conservative operators like Diana Shipping (NYSE: DSX  ) have yet to sound the all-clear. Asian steelmakers are running full steam ahead, while their American counterparts remained at just 55% of capacity during the third quarter.

Compared to economists, Fools have it easy. Economists are expected to predict the track and timing of a recovery before (or while) it occurs, while Fools can opt to cash in some gains from an incredible equity rally and wait to confirm for themselves the first palpable corroboration of a truly sustainable recovery. Everyone has an opinion about recovery, so please share yours in the comments section below, and cast your vote in this Motley Poll.

Do you have a real feel for steel? Clear improvement from the worst levels to date is a welcome sight, but this Fool cautions against premature celebration. To keep track of the complex set of factors affecting domestic industries, join the free Motley Fool CAPS community and ask 140,000-plus fellow investors what their research suggests.

Fool contributor Christopher Barker is the Nat King of Coal and the wild boar of iron ore. He can be found blogging actively and acting Foolishly in the Motley Fool CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Diana Shipping. USG is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a stainless disclosure policy.


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  • Report this Comment On December 14, 2009, at 5:53 PM, davejh23 wrote:

    "Recovery cannot be fully confirmed as long as massive stimulus and liquidity injections remain in place."

    Call it a recovery when there's actual growth...not including massive deficit spending. The economy contracted in 2008, and even if annualized Q4 '09 growth is 5%, the economy will have contracted for the full year in 2009 as well...that's including HUGE deficit spending. In 2010, we may see 2-3% GDP growth, but without trillion dollar deficits, that would be more like 10% contraction...if the gov't had maintained a balanced budget, we already would have seen a 20% contraction. I'll be convinced when we have a balanced budget and "real" growth...it could take a decade for the real economy to grow $2 trillion while the gov't gradually pulls back spending and pretends that we have a $14 trillion GDP.

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