Dow Holds Above 9,000. Home Sales Improve

Recession innovators extending lead over the pack. Mobile advertising gains.
In most parts of the United States, the recession seems to be losing steam and economies are beginning to stabilize, the Federal Reserve said today in a snapshot of economic activity from across the country. This assessment is based on the Fed’s latest “beige book” (PDF)which gauges economic conditions from 12 distinct areas of the country.

“Recession is over, economy is recovering — let’s look forward and stop the backward-looking focus,” John E. Silvia, Wells Fargo’s chief economist, wrote yesterday in a research note.

We're one-third of the way out of the recession, according to Kiplinger's Recovery Index, which tracks six key economic indicators. The National Association of Realtors (NAR) just said that sales of previously occupied homes rose 3.6 percent last month, the third straight month to do so. It was the highest level of sales since October 2008 and beat analysts expectations. Meanwhile, the Case-Shiller index of home prices in 20 metropolitan areas, produced by Standard & Poor's, rose 0.5% in May from the month before, the first increase after 34 straight months of decline. If you’re keeping score, the median sales price nationwide is now up to $181,800, up from 174,700 last month -- still 15 percent below $215,000 a year ago – but a key positive trend to be sure.

According to Kiplingers, home prices may be bottoming out after two years of decline (some say they bottomed out six months ago), but at least people are buying stuff. Said the Kippies: "Home sales activity is a key indicator of the economy's health because buying a house involves such a large commitment of funds, reflecting confidence about the future. Rising home sales also show that banks are willing and able to lend, which is another requirement of a healthy economy."

But, what about the sky high unemployment rate? Oh that. Jobless claims are still at record highs, but since unemployment lags behind other economic indicators, that’s not the downer it may appear – provided you’re among the lucky few still working. Breaking from historical patterns, the unemployment rate -- currently at generation-high 9.5 percent -- is ONLY one to 1.5 percentage points higher than would be expected under one economic rule of thumb, Lawrence Summers, President Barack Obama's top economic adviser told the Wall Street Journal last week. Since the recession began in December 2007, the economy has lost 6.5 million jobs, 4.7 percent of total employment. The unemployment rate has jumped five percentage points, while the economy has contracted by roughly 2.5 percent.

If you can take a moment to ignore the painful shrinkage to your retirement account, investments and college savings plans, the midsummer stream of earnings reports from major companies is refreshing, and so is the market's reaction to them. So far, July's quarterly results are reassuring in the macro view. Neither the economy nor the indexes are on the verge of backsliding, and they've helped push the Dow above 9,000. Some 61 percent of the companies in Standard & Poor's 500-stock index to report for the quarter beat analysts' forecasts.

White House budget director Peter Orszag and Fed Chairman Ben Bernanke have all talked publicly about the unusual disconnect between growth and employment. Though today's disparity between growth and jobs is especially stark, a jobless recovery wouldn't be new: The past two recessions were marked by firms reluctant to resume hiring right away after demand recovered. The current disconnect could reflect an unanticipated surge in productivity -- companies finding ways to increase output with fewer workers. That could set up the economy to grow rapidly in future years. Rising productivity is the linchpin of economic growth and rising living standards.

As history shows time and time again, if the wisdom of the crowd thinks things are getting better, then they eventually WILL get better, because so much of our economy (and marketing strategy) is based on psychology, rather than true fundamentals. as we predicted earlier this year (“Recessions Can Spawn the Best Ideas”) companies that hunkered down during the depths of the downturn – rather than full scale retreat – are starting to show the fruits of those decisions.

Innovation Rules

Last week Apple Computer reported its best non-holiday quarter ever -- earnings up 15 percent -- despite continued malaise in the overall electronics sector. Meanwhile the U.S. financial markets leapt to their highest level since November on news that The Conference Board’s Index of leading economic indicators rose for the third straight month in June. While the increase was a modest 0.7 percent, the index hasn’t had a three-month win streak since 2004 and seven of the 10 data points it tracks showed improvement including building permits. The S&P 500 Index – in which 70 percent of companies have posted better than expected earnings -- is up 5.3 percent for the year and up 41 percent since its early March nadir. The broader Wilshire 5000 Index is up 7.5 percent for the year.

Analysts point to unexpectedly strong sales of Macintosh computers and a surge in iPhone purchases. We’ve been banging the “innovate when times are worst” drum for months here in this blog and Apple’s an example of why. Its products work and function the way the human brain thinks. {Disclosure: we have not financial or promotional interest in Apple Computer, Inc.). Apple customers – not corporate I.T. wonks or Indian outsourcing farms – control the customer experience.

“We’re making our most innovative products ever and our customers are responding,” said Steve Jobs, Apple CEO in a statement. Shaw Wu, a Kaufman Brothers analyst, told the New York times that Macs were “resonating with increasing numbers of customers, as it is arguably the best platform for what people do today, which includes Web surfing and creating and managing content.”

Thanks to the Web, the rules are dramatically changing in the music industry too. The Internet, not record labels, is increasingly calling the shots when it comes to promoting and distributing music. Physical album sales fell 20 percent to 362 million last year, according to Nielsen, but sales of individual digital tracks rose 27 percent to 1.07 billion – that’s right billion – more than enough to make up the shortfall.

Major record labels no longer have an iron fist on creating and selling professional music and getting air time on the radio. Polyphonic and other savvy startups are running their record labels like VC firms, by investing in promising bands, allowing them to record their own music and choose outside contractors to handle their publicity, merchandising, touring, etc. Instead of groveling for advances and praying for royalties if they create a hit, musicians share in all the profits from their music and touring. Guess what, they’ll also maintain ownership of their own copyrights and master-recordings. Can you imagine Sony, Warner or EMI cutting deals like that with up-and-comers, let alone their stars?

The year of the true multimedia campaign?

Three in four (74%) of advertisers using the Internet are doing so more than they did a year ago, while half (49%) who use print are using it less, according to a recent Linked In / Harris poll (PDF) of 1,015 ad agency and marketing execs nationwide. The poll not only found 69 percent of mobile marketers are using the medium more than they did a year ago, but more than half of online advertisers overall, are using the Web as part of a broader multi-media campaign. Just one in seven (14%) Web advertisers, are committing dollars only to online.

We’re not out of the woods by a long shot. But those who continued to trust their instincts, resourcefulness and innate sense of direction during the darkest days are going to be the first ones seeing the clearing through the trees.