The nature of economic recovery: it's all about time

Forward-looking surveys of the economic mood are giving mixed messages. service sector datatoday, showing the strongest increase in orders for more than two years , reinforced the widely held view that the UK came out of recession in the final quarter of 2009. On the other hand, Nationwide's gauge of consumer confidence showed a steep fall in December. In the circumstances, investors may do better to concentrate on hard historical data – such as UK corporate profitability. That showed a decline for the sixth quarter in a row in the third quarter of 2009. Returns on capital employed were at the lowest level for 16 years, said the Office for National Statistics. The third quarter of last year may feel like ancient history in investment terms. Don't investors try to anticipate events rather than look backwards? Well, they do, but they would also have expected profitability to have stopped falling by last autumn. The arrival of the recession, after all, was hardly a secret. Companies had time to prepare by cutting overheads and capacity. By the third quarter of last year, when GDP fell only fractionally , companies in the UK would have expected to reap a benefit from leaner workforces, lower capital investment and increased pricing power. That, roughly, is how the story developed in the US, where corporate profitability appears to have turned the corner. The UK seems terribly slow to follow. It's another reason to worry about the nature of the recovery when it arrives. Gradual is the best guess, even if this worry cannot yet be detected in roaring stock markets. Give it time.