Ravengate
Partners - Stock market, economic and political commentary by Patricia Chadwick

There is a large part of the U.S. economy that is not on investors’ radar screens. I am not referring to the underground economy or the barter trade economy or the money that is paid to illegal immigrants.

The invisible economy is much bigger than that. It is the vast part of our GDP that is not measured by stock prices on stock exchanges. I am talking about the “Ma and Pa” entities, the family run businesses, the real estate companies, the printing presses, the restaurants – companies not publicly held because they are either too small or because they prefer to remain privately held. They are the primary engine of job growth in this country. Many, many of them are profitable and well managed. Some of them are quite large. But most of them are small, and therein lies the problem.

As the banks continue to deleverage and shrink their over-bloated balance sheets, they must of necessity lend less. They are happy to lend to the Federal Government, which may have a dreadful balance sheet but is considered a good risk. They are even happier to lend to large, publicly traded and already well-financed corporate giants whose earnings have been improving. Fortunately, there are more and more of those companies these days which is good news. The banks are also increasingly lending to homebuyers, now that the risks have been mitigated due to lower home prices and increased down payments.

But left out in the cold are so many small companies with good business plans and positive working capital and profits. It is those companies that have been ignored or denied capital, as the banks have restructured their balance sheets. Without bank financing, many of them cannot carry on business, much less grow.

There is no lobby for this large and silent sector of the economy, no spokesperson to plead their case to the Government or to the banks for them. If they are left without access to capital, they will eventually fail and that will be a serious problem for employment growth and for sustained economic expansion.

The current burgeoning recovery in the economy is evident in the earnings of many our biggest companies in a wide array of industries, and their stock prices are reflecting the improved earnings and the stellar productivity gains achieved. But in order for the U.S. economy to recover fully, the great unwatched and unseen segment must also participate. Today much of that part of our economy is still in recession and without the banks serving them as banks should, they will remain there.

It’s all about the delta in the economy. That is, those little bits of change that add up and have the potential to make a meaningful impact – for better or for worse.

We are seeing positive delta all over the place in the U.S. economy. On the job front, the employment numbers are getting better. On the manufacturing front, inventories are being rebuilt. On the spending front, the consumer is getting a bit more venturesome.

If you go to Craig’s List, you will see that the job postings are steadily on the increase. Try to find a carpenter (as I am doing right now) to fix the garden fence destroyed by the storm two weeks ago, and he is busy. But only two months ago, he called wondering if there was any work he might do to bring home a little extra income. That’s positive delta.

And perhaps best of all, the state of the corporate balance sheet in the U.S. is healthy, really healthy. That, together with the astounding productivity gains they have been achieving, may encourage companies to increase capital investments. That would certainly provide more positive delta.

But we all know that delta can work both ways, and we need to keep our eye on what negative delta might also be out there to offset the brightening economic picture.

Here’s what comes to mind. Will China continue to be the engine of growth in this recovery? If so, then the delta force will gather strength. If not, if in fact China’s growth is peaking, we could be in for a nasty pullback.

Will there be negative delta as the Federal Government stimulus program comes to an end later this year? It is hard to believe it won’t have some impact, but if the private sector has developed enough of its own momentum, maybe the two will wash each other out. That would be good news, because private sector demand is more sustainable and more profitable than Government stimulated demand.

What will be the impact of the cessation of the $8000 tax credit for new home buyers at the end of this month? Most likely, it will be negative delta on home sales and home prices.

What will happen when unemployment benefits start to run out? Will the delta impact be negative? Or when the census workers are no longer needed? Or what if oil prices sky rocket? For sure that will be force negative on the consumer’s pocketbook. Or if interest rates head up too soon and too fast? A few small negative bits of delta can also add up.

It’s all food for thought. But for sure right now, there are more positive bits of delta than there have been for the last two years.