“IN OUR SPRINGTIME EVERY DAY HAS ITS HIDDEN GROWTH IN THE MIND, AS IT HAS IN THE EARTH WHEN THE LITTLE FOLDED BLADES ARE GETTING READY TO PIERCE THE GROUND”

– GEORGE ELIOT

We recently attended a speech by a nationally recognized economist who asked the audience “who thinks the recession is over?” We were one of only two people who raised their hand. The economist stated, “that response is typical of what I see when I give speeches about the economy these days.” Most people do not believe we are out of the recession. During the early part of a recovery and at the beginning of the middle part of a recovery, it is typical for people not to believe the economy is recovering. It is only after the economy has recovered for a while that people begin to believe it.

Recessions are a normal part of the business cycle. For many years, however, Federal Reserve Chairman Alan Greenspan was managing the business cycle to avoid recessions. We believe that this managing of the business cycle and the subsequent avoidance of the healthy long-term process of “creative destruction” actually made the most recent recession more severe than what it might have been. Why? Because as the Fed was trying to avoid recessions, it’s easy money stance produced multiple, ongoing bubbles in the economy – technology stocks to real estate to commodities, to name a few. This pushed the inevitable pain further down the road and ultimately made it worse. As a result of the extended period since the country faced a significant recession, many people forgot that recessions are part of the normal course of a business cycle and the “creative destruction” associated with recessions work out the excesses in the system.

The next step in a typical cycle is for companies to run out of inventory and be forced to order goods just to maintain ordinary business. We believe this replenishing of inventories was occurring at the end of 2009. This caused earnings to rise. The next step in the cycle is for companies to begin adding to inventories so that they do not lose out on any business opportunities. They do this when the economy appears to be doing better. We believe we are at the beginning of this stage of the business cycle.

Along with the business cycle, there is a cycle that comes to bear on consumers as well. At the beginning of the past recession, consumers stopped spending, paid off debt and saved for the first time in years. According to the Federal Reserve, the number of credit card accounts in the United States has dropped 24% since its peak in the second quarter of 2008. Moreover, revolving credit, which is largely comprised of credit card debt, has fallen on a month-over-month basis for the past 26 consecutive months through October 31, 2010. Total revolving credit was $800 billion, roughly the same amount as the $799 billion total from December 31, 2004. This holiday season, a large percentage of consumers’ expenditures are being paid for with cash, not credit cards. Consumers are also buying more clothes than electronics. This makes perfect sense. When the typical consumer decreases their spending, one of the first areas to go is clothing. Why buy a new pair of jeans when you can get another month or two out of your old ones? The increased purchase of clothes is a good sign that the economy is truly recovering.

Many people ask “how can the economy recover without employment recovering?” The key is to understand that employment lags during a recovery. Companies don’t hire people right after a recession. The first thing they do is increase the hours of their current employees. This has been occurring for quite a while. Eventually, companies have to hire so that their employees don’t burn out. Once they get the most out of their current employees, companies then hire part-time workers until they believe the recovery is sustainable. Recent data shows that this process has been underway for several months. From September 2009 through September 2010, temporary employment grew 23.4%, the largest yearly gain since the U.S. Bureau of Labor Statistics began tracking temporary employment data in 1991. This shows that the economy is in the early stage of the middle of a recovery. The next step for companies is to hire full-time employees, which we expect to happen in the upcoming months. This is the normal course for a cycle and is another clear sign that we are no longer in a recession.

Many people view the economy as a mysterious thing. The economy is really just you and me. Go back to the past two holiday seasons. Did you spend less on presents because you were worried about the economy? This year, are you spending more on presents than you did last year? We know for our families, the answer to both of these questions is yes. Based on some conversations with friends and clients, their answers are yes to both as well. Those individual decisions to spend more help the economy – just as deciding not to spend hurts the economy. These are other signs that the economy is healing and 2011 should be a good year.

Estate Tax Update

In our September newsletter, we promised to update you if there was any movement with respect to the Bush tax cuts. Late last week, the House approved, by a vote of 277-148, a massive bipartisan tax package that will, among other things, extend the Bush tax cuts through 2012. The bill was overwhelmingly approved by the Senate earlier in the week. President Obama signed the bill on Friday. The bill also addresses the estate tax, which, if you remember, was scheduled to return in 2011 with a $1,000,000 exemption amount and a top tax rate of 55%. The new law, which becomes effective on January 1, 2011, provides for an exemption amount of $5,000,000 and a tax rate of 35%. This effectively allows a couple to pass $10,000,000 of assets estate tax-free to their beneficiaries.

We want to wish all of you a very Merry Christmas and a safe and happy holiday season. See you next year!!!!!