Which way from here?

As I sit putting the finishing touches on my 2008 personal income tax return (yes, I filed a timely extension), all the forms and figures cast my thoughts in several directions. Is the economy on the mend? Or is it, like Apollo Creed at the of Rocky II, just acting like it's going to get off the mat, only to slump again and be counted out? What about the stock market? I hear all sorts of chatter about bears becoming bulls and bulls turning to bears. What about skyrocketing federal budget deficits and Obamacare looming on the horizon? How will government action affect the economy and the markets? What is really going to happen? Well, my favorite answer to most questions is... it depends.

Our massive economy, more than four times larger than the second largest (Japan), truly makes the world go round. It is so involved and complex that it becomes nearly impossible for the common man to even begin to understand all things that can have an impact on it. The Conference Board recently released its monthly update on leading and coincident economic indicators. These two measurements attempt to reflect how the economy is doing now (coincident) and how it may perform in the future (leading). In summary, the LEIs had fallen for twenty straight months, but have been rebounding strongly for the past five. The CEIs have now leveled out. Taken together, these two indicators strongly suggest a near-term recovery for the economy. However, jobless rates continue to increase, with the unemployment rate nationally exceeding 10% for the first time in 25 years. Are we in store for a "jobless" recovery, where companies become profitable and expand without rehiring workers? Will the recovery materialize at all? Time will tell.

There's no doubt that there exists within the recent market recovery a not-so-subtle psychological lift for all those who suffered great losses over the past year. But many still remain very leery of the markets. Some, including many elderly investors, have sworn off the markets entirely (and, in most cases, rightly so). Still others, who have seen the markets rise a full 50% from the March 2009 lows are reticent to get in now, fearing they may suffer another pullback. As the economy begins to break into positive territory, the markets will continue to move higher based on the prospects of more consumer spending, especially seeing the recovery in their 401(k) and other retirement accounts. The unemployment rate may turn out to be the great Achilles' heel of the markets. If unemployment remains high, even in the face of other "recovery" indicators, the markets will remain spooked about another dip into recession. Consumer spending accounts for 70% of all economic activity. When consumers don't have jobs, they don't spend.

Finally, looming on the horizon like a big black storm cloud, is the government. Will tax rates go up? If they do, will they wreck the recovery? How will we pay for nationalized healthcare? How will we pay for the debt we already have? How much is the interest cost on the national debt annually anyway? If we have too many people unemployed, will tax revenues continue to go down as deficits rise to unheard of levels? Why do 10% of Americans pay 40% of the taxes and 40% of Americans pay no taxes? What if the guys who pay the most stop spending and investing? Well, I don't have a crystal ball, but if you look closely and follow the signs, you won't be surprised by what comes around the next bend.