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Why the Economy Might Not Be as Bad as You Think

U.S. News and World Report Smarter Investor

Banks have better balance sheets and corporate earnings are strong.

When it comes to the U.S. economy, there’s a lot of “gloom and doom” out there—bad news sells. Nevertheless, here are a few points about the U.S. economy that you may not have heard about:

Banks are better off.

The FDIC reports the number of banks that they consider to be in trouble on a quarterly basis. At the end of the first quarter, the number stood at 888. Through the second quarter, the number was down to 865. Additionally, total assets at troubled institutions shrank from $397 billion to $372 billion.

In my world, it looks like the banks are getting better. And for those who think this may be too short term of a look, this is the first quarter-over-quarter reduction in these numbers in five years.

Corporate earnings are strong. Almost all of the Standard and Poor’s 500 (S&P 500) companies have reported earnings, with 71 percent beating their profitability estimates. Digging deeper into the earnings reports shows that the S&P 500 sectors that were higher than the 71 percent average for the entire S&P 500 were Consumer Discretionary (79 percent), Technology (75 percent), Financials (74 percent), Health Care (74 percent), and Consumer Staples (72 percent).

Many of these sectors are “cyclical” in nature. If the economy was all that bad, wouldn’t they would be poor performers?

The United States is not Japan.

Japan’s economy has been declining for more than 20 years, but the driving forces behind their economic woes are completely different from the United States because of three things: population growth, politics, and deflation.

First, Japan has had no real population growth in 20 years. While the population has aged, low birth rates and immigration restrictions have resulted in a surplus of real estate, driving down prices.

Second, Japan has had virtually the same political party in power for almost 20 years while its real estate market, stock market, and economy have floundered. The people of the United States won’t stand for that for 20 years!

Finally, the Japanese are savers and actually like deflation because the money they save today will buy more goods and services tomorrow. Americans―notorious for their weak saving habits—don’t like deflation.

Our economic policy will continue to disappoint.

This is not a political comment, it’s just a fact. The American public has lost confidence not only in the President and Congress, but in the Treasury and the Federal Reserve.

Look at the most recent Michigan Consumer Sentiment Index, which was down almost 10 points from July to August. The preliminary reading of 54.9 was far below the forecast of 63. It was also the lowest reading since 1980.

The American public thinks our economy is the worst off it’s been since 1980. Assuming nothing changes before November 2012, we may not see much optimism over the next year.

David B. Armstrong, CFA, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. David has been named one of America’s Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010, based on assets under management) and has been interviewed by several national media sources over the past several years. Follow David and Monument Wealth Management on their blog Off The Wall, on Twitter at @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual investors. To determine which investment is appropriate, consult your financial advisor prior to investing. All performance references are historical and do not guarantee future results. Asset allocation does not ensure a profit or protect against a loss.

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