The sharp downturn that has pummeled the U.S. economy for virtually all of 2008 may be coming to an end, according to our latest corporate survey results. The new ChangeWave survey shows a slight improvement in 2nd Quarter corporate sales and a stable pipeline going forward.

Yet even as the economy begins to stabilize, the positives are tempered by a series of highly formidable negatives - including a huge increase in inflationary pressures, a worsening labor market, negative capital spending growth, and a continuing credit crunch for American businesses. A total of 3,152 U.S. respondents participated in the May 27-June 5th survey.

Signs of Stability

Better than one-in-five (22%) respondents now project that their company sales will come in Above Plan for the 2nd Quarter - 2-pts more than in the previous quarter. Another 30% say their company sales will come in Below Plan - unchanged from previously.

The current uptick in quarterly sales is a small but measurable improvement over the previous quarter. Importantly, it's the first upturn in this metric since June 2007.

But while the latest results are not as bad as last quarter's survey, before you break open the champagne check out how different things are from a year ago. The current Below Plan sales percentage remains way higher than the Above Plan sales percentage - almost an exact reversal from a year earlier.

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We also looked at corporate sales pipeline projections for the 3rd Quarter, and here we are able to say that things finally look stable - with 23% of respondents saying their company will come in Above Plan, 1-pt more than the previous quarter.

But even as the U.S. economy shows signs of stabilizing, there are major obstacles that - viewed in combination - are likely to temper any real economic momentum for the 2nd half of the year.

Here are four of the biggest party killers:

Inflationary Pressures: For the second quarter in a row we're witnessing the effects of powerful inflationary pressures, with an unprecedented 25% reporting prices are rising for their company's products - up 4-pts from previously to the highest level since we began asking this question back in September 2001.

Labor Market Woes: In yet another bearish sign, the labor market continues to worsen. Only 17% say there are More new hires in their company at this point in the 2nd Quarter - a 1-pt decline since the previous survey. Another 20% say there are Less new hires-- 1-pt worse.

Negative Capital Spending: In another worrisome finding, respondents are still projecting negative capital spending growth going forward. Just one-in-ten (10%) think they'll see an increase in their company's 3rd Quarter capital budget, while 22% think they'll see a decrease.

Continuing Credit Crunch: To top it off, the U.S. credit crunch continues to negatively impact businesses. A total of 18% of respondents say it's now harder for their company to borrow money than it was just 90 days ago. Only 1% say it's easier to borrow.

Despite all these negatives, the fact that U.S. corporate sales have stabilized is a clear indication that the economy is beginning to stabilize. And investors who know which sectors of the economy have momentum right now are going to be able to gain a clear edge over everybody else.

In our previous quarterly survey, only one sector showed real improvement - Natural Gas and Oil. But in the current ChangeWave survey, there are a handful of sectors that are beginning to show signs of momentum, including:

We're also picking up a sudden burst of activity among defense contractors.

In sum, the overall takeaway for now remains two-fold:

The Good: The U.S. economy has begun to stabilize.

The Bad: The economic positives are tempered by a bevy of formidable negatives - including high inflation, a worsening U.S. labor market, negative capital spending growth, and a continuing credit crunch for American businesses.

Taken together, these negatives are likely to temper any real economic momentum as we enter the 2nd half of the year. But there are big profits to be made by investors who focus on sectors with momentum.

To stay up-to-date on ChangeWave's future corporate survey findings, simply sign up for our free newsletter.


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