kiplinger connection
The Economy • Investing • Energy

The Economy: There’s talk of recession if business spending lags.
Investing: China stocks will continue down. U.S. market will recover.
Energy: Use of liquefied natural gas will go up . . . if supplies hold up.

The Economy
After a volatile week in the markets ...
Recession talk is making a comeback.
It looks as if businesses expect one, judging from surprisingly low investment levels and the scant increases in firms’ inventories. Also, factory output took a dive in late 2006.
And housing is still on shaky ground, raising worries about the impact on consumers.

Is it time to hunker down for a slump?
We don’t think so. Sluggish growth is still growth, and there are some indications that the pace will pick up before much longer. Manufacturing managers, for example, say that they’re seeing orders rebound. In fact ...
We expect stronger second-half growth of about 3%. That’ll follow a first-half gain of between 2% and 2.5%, on an annualized basis, in line with the pace seen since last spring.

Consumer spending is holding strong ... key because it accounts for 70% of the economy. Confidence is high, due to tight labor markets and rising wages plus robust gains in real disposable personal income.
There’s no stopping the export train that’s delivering profits to many industries. The falling dollar is boosting U.S. competitiveness, both on the export side and for stateside firms competing with imports.

For now, the missing piece is business spending. Its absence is what’s hampering growth, and unless that support turns up soon, the economy could tip into a downturn. But we expect business to step up.
For the most part, firms have been using up swollen inventories. They’d been built up in first-half 2006, when managers were too bullish, and then accentuated by the sharp pullbacks in housing and auto demand.
That’ll start to change this spring, leading to full-year growth in business spending of 5.5% ... most of it coming in the second half.

For investors, the market swoon represents a buying opportunity, especially in semiconductors, retail, energy, and telecommunications.
A correction is a plus for what had been a raging bull market. It cuts the chances that stocks will simply drop off a cliff later on.
Equity fundamentals are still solid. Ratios of prices to earnings aren’t too high, by and large. They’re in line with historical averages. Earnings growth, though slowing down this year, is far from crashing. Profit gains of S&P 500 firms will average 7.5%, about half last year’s.
The bottom line: Don’t panic, and keep your eye on the horizon.

Investing
Chinese stocks will probably fall a whole lot more before long.
Shanghai’s main stock index has risen 120% in the past year and more than 50% since Oct., and that’s even after its recent slip.
Rampant speculation has fueled the rally, pushing valuations well beyond what companies’ financial fundamentals would justify.
The government is clamping down on speculators. For example, regulators will make it harder to take out bank loans to buy stock. Just talk of action is, for now, enough to rein in the market.

Should this worry investors in U.S. stocks? Not really.
China’s economy won’t tank, spreading pain around the globe. A very small percentage of Chinese firms actually depend on the market to raise funds. Banks are far and away the main sources of financing. Stock crash or no, China’s economy will still expand 10% this year.
A less exuberant stock market would help the Chinese economy over the long term. Overinflated stocks give some local businesses access to too much capital, which they use to make unwise investments.

Will U.S. investors worry about China anyway? Of course. Look what happened in the U.S. when Chinese shares plummeted Feb. 27.
China’s economic prominence gives its market psychological pull over investors’ decisions here. It’s an acknowledgment by Americans that the two nations’ fortunes are becoming more closely linked.

Energy
Five new liquefied natural gas terminals will be built this year.
But there may not be enough LNG to keep them busy. Competition for supplies is fierce, with Japan, China, and Europe all in the hunt.
Expect U.S. LNG companies to go after long-term contracts, especially with firms in Australia, where production is rising steeply. Unless a steady supply can be secured, the long-awaited breakthrough for LNG will be delayed ... again. With the five planned LNG terminals, and others expected after that, LNG’s share of natural gas consumption could hit 12% by 2012, up from 2.7% last year ... IF the supply is there.