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Economy showing signs of improvement

Spotlight On Finance

— Slow revenue growth has also made cost reduction a relentless mission. Commodity price hikes have eased in recent months, yet employment costs continue to rise. Many businesses also report sizeable increases in the cost of healthcare premiums. And businesses are reportedly bracing for the impact of the Healthcare Act by reducing hours or employment. Without significant revenue gains, businesses seem likely to remain very cautious about expanding.

Overseas Growth

Continuing improvement overseas will be critical this year. Waning momentum in emerging economies like China is worrisome, and the financial crisis in Cypress warns that Europe could also be regressing.

It seems foolish to argue that the world’s economic problems have been solved. Yet economies usually grow faster when authorities ease monetary policy. And global monetary authorities have infused a lot of money into many economies! Although that level of money growth may eventually have inflationary consequences, it should bolster shorter-term economic growth.

Economic recoveries occur in fits and starts, allowing many to doubt recoveries until they are well under way. Despite current doubts about recovery in the emerging world, improvement there remains likely. Even without strong growth there, global recession looks very unlikely. Global growth will certainly be more robust, however, if the emerging economies can reaccelerate.

Equities

Equity prices should continue to advance as long as we can avoid recession in major segments of the global economy. Even so, the economic cycle is mature. That means that the best profit growth is probably behind us since margins have already peaked for many companies. Volume gains will still drive profits higher, but the rate of profit growth will be slower than during the early stages of economic recovery.

Doubts about growth overseas have helped U.S. equities rise to new highs. Some analysts now think that U.S. growth will drive equity gains here even if overseas economies falter. Yet domestic growth also remains anemic, which suggests the United States needs improved growth overseas to fuel sharp domestic gains.

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