Over the course of June, the market swooned on fears that the economy was on a downward path. And sure enough, the economic data have indeed been sobering. Just this morning, we learned that the economy created a paltry 71,000 private sector jobs, and the unemployment rate seems to be stuck in the 9.5% area. When you consider that the U.S. population grows by about two million per year, it’s clear that we’d need to see roughly 200,000 jobs created every month to help bring down unemployment. And that’s unlikely to happen anytime soon.

Yet investor sentiment toward this bleak set of news seems to have made an about face. The Dow Jones Industrial Average and the S&P 500 were each off around -0.5% on the weak employment news, indicating that fewer investors are fleeing the market whenever a bleak economic report hits the tape. Tepid economic data in the near-term is now to be expected, and as long as the economy doesn’t slide back into recession, investors may actually start to see the glass as half-full rather than empty. It’s important to remember that 18 months ago, we were looking at massive job cuts and little job creation. Now, it’s just the latter factor that’s in play, and it’s a question of what will it take to help get the jobs machine humming again.

#-ad_banner-#Lacking torque
To use an analogy of car engines, the economy has ample horsepower (potential strength available in reserve in the form of infrastructure, industrial capacity and a highly-skilled workforce) but very little torque. Torque in a car engine is a twisting force that can pull a heavy vehicle up a hill or out of a hole. And right now, we’ve got no torque in the economy.

But just as an engine lugs when trying to pull a load at very low speeds, it can also build a nice head of steam once even a little torque comes into play and the engine speed climbs a bit higher. And that’s right where we are with the economy.

All of the pieces are in place for a faster economy that can capitalize on all of our latent horsepower, and soon enough, we’ll apply some torque. Here are several reasons why I think economists will look past the rest of this year’s monthly employment numbers and focus on a slow and steady rebound that should arrive in 2011.

• Housing — The housing market has remained in a slump for far longer than anyone imagined. And though the numbers continue to look bleak in this sector, an important helpful trend is underway. Every year, the U.S. creates 1.3 million new households. Yet new homes are being constructed at less than half that pace. An extremely cautious homebuyer is masking that trend, as many look to live with their parents or with friends. But in time, perhaps in 2011, that pent up demand should finally be unleashed, especially in light of this next bullet point…

• Savings — There has been a great deal of hand-wringing about a lack of consumer spending, with many citing the stubbornly high unemployment rate. But it’s actually the 85% of the workforce that is employed that is the problem. They’re saving rather than spending to restore depleted personal balance sheets. The personal savings rate reached 6.4% in June, according to the Commerce Department. That’s triple pre-recession levels. At some point, sooner rather than later, personal savings in many of these households will be fully restored. And that should finally give a lift to retailers that have cut ample costs and are poised for nice profit gains once sales rates move up a little.

• Corporate Cash — It’s hard to overstate the importance of the corporate sector. As I noted, Fortune 500 companies are sitting on $1.8 trillion in cash. And that cash balance keeps rising every quarter. If history is any guide, companies will start to re-invest in growth opportunities, which would have so many beneficial effects for housing, consumer spending, government tax receipts, and so forth.
   
• Low, Low Rates — Interest rates have been stunningly low as the Federal Reserve aims to help stimulate demand for bank loans. But as economists like to say, “it’s like pushing on a string.” Nothing seems to be happening. But the Fed will stay quite patient, and wait for those factors mentioned above to kick in. Bond guru Bill Gross, who runs PIMCO, the nation’s largest bond fund manager, predicts that rates will stay low into 2013 or even 2014. While some may fret that this will lead to inflationary pressures, there is so much slack in the economy that we need to see a very long phase of very robust growth for that to happen. And nobody expects that to happen.

Action to Take –> It’s dark out there, but there is ample reason to believe that dawn will soon be coming. You’ll need to be prepared for an eventual upturn even when it appears to be only modest. That’s because even a little torque could put the economy back into gear. Retail, construction, and IT remain as the three best ways to play an eventual recovery as expectations are very low and earnings leverage in these groups is very high.