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Kneale: Are We Psyching Ourselves Out of a Recovery?

We here in the US are beleaguered by the stubbornly high jobless rate, the soaring federal deficit, anti-biz demogogues in the capital, and Euro-jittersand fearful flashbacks from the meltdown. We are innervated by our inability to tame that gusher in the Gulf. The tepid retail numbers released this morning only add to our anxiety.

But our morale may be so broken that we are getting in our own way. We are, many of us, missing a brighter picture.

In that brighter pix, private-sector job growth is far higher than what the media have reported; infrastructure demand is booming and will surge in the decade to come, while heavy-metal multinationals see no order cutbacks despite the fretfulness of recent weeks. Non-financial companies have socked away an extra $380 billion in cash in the past year, the biggest rise in six decades.

And consumers, God bless ’em, are healing. Household net wealth added another $1 trillion in the first quarter, the government reported late yesterday. Despite the decline in retail sales in May, consumer sentiment improved better than expected in the University of Michigan confidence index released today. It is now at its highest level since January 2008.

“The good times may already be here,” says Adam Aron, chairman of World Leisure Partners, a travel consulting firm, and a board member of Starwood and of Norwegian Cruise Lines. “Maybe the media have missed it.”

Aron was one of several dozen power players who gathered at the New York Stock Exchange this week for the Yale CEO Conference. Senior execs, entrepreneurs, academics and government advisors swapped sentiments and forecasts, all of it off-the-record. They were prodded by their host, the expansive and voluble Jeffrey Sonnenfeld, a Yale fellow well met, who was kind enough to let me sit in.

“What I’m hearing here is CEO after CEO said things are getting better,” Aron says. “Eighty percent of people in this room—and this is a pretty serious room—said the recovery is under way.”

“Travel bookings are booming,” he adds. He works with a high-end Jamaica resort that is already 90% full for June. He looked at a dozen travel stocks now versus a year ago and found every one was up by two-to-five-fold. In November 2008 Aron put $1 million into travel stocks. He tripled his value, and then suddenly, for little apparent reason, his stake fell by 20% in four weeks. “Ridiculous.”

Private Sector Creating Jobs, Not Government

People remain fearful of the high unemployment rate, but they are missing the real story, argues D. Quinn Mills, a Harvard University economist who also attended the conference. “The public discussion contributes enormously to the sense that things aren’t improving, that we’re going the wrong way.” But the jobs outlook is “much better” than widely believed, he says.

He worries that companies are making the wrong calls based on erroneous use of jobs data. The most recent government jobs numbers jolted investors when it showed that, of 431,000 new jobs created last month, only 41,000 came from the private sector. But that tepid total is seasonally adjusted; the actual figure, unadjusted, was a robust 711,000 private jobs.

In fact, of 2.7 million new jobs created since January (non-adjusted), the private sector—not the government—created 2.6 million of them, Mills says. Seasonal adjustments “are increasingly outdated and applied erroneously,” he avers. And he personally worked with the U.S. Bureau of Labor Statistics, decades ago, to craft the very adjustment techniques he now criticizes.

The execs, ever cautious, spent plenty of time fretting over bloated government spending, uncertainty in Washington, competition from developing nations and whether to trust government numbers.

So much so that one government guy chastised them: “You guys are worse than the bedwetters in Washington!” He added: “This is the same handwringing we get in the political sphere all the time.” Yet economic conditions are “promising,” and “the odds are in our favor” over the next year, the G-man said. The hard part: getting people to resume taking on risk. “That’s gonna be the challenge we face.”

When volatility is so high, it is hard to place bold bets, whether you lead a multinational manufacturer or your own three-person startup. “I’m bullish on the world, but the question is short-term vs. long-term,” Aloca Chief Executive Klaus Kleinfeld told the room.

“In the short-term, you see huge volatility, which causes people to question whether they should make investments now. Volatility has a similar impact on boardroom decisions,” Kleinfeld says. “It changes people’s behavior, they shift out decisions to the future and that becomes very problematic.”

He adds: “This volatility is going to affect everything, and it’s going to infect our brains.” He can’t comprehend what all the recent downer stuff is about. “We are human beings, and human beings can adapt and adjust.”

Long-term, three billion extra people will populate the earth by 2050, and most will live in cities, so infrastructure investment will be high, he said. The demand for aluminum, rising 4% a year historically, has grown 6% a year since 2000, fueled by China. This year it is likely to grow 10%.

One big and often overlooked factor driving that infrastructure boom is India, long the forgotten sibling at the dinner table at a time when everyone wants to talk more about China. Yet India has a real chance of eclipsing China, building a bigger middle class and a far more entrepreneurial culture. Investors may be overlooking this long-term prospect.

India expects to spent $1 trillion on buildings, roads and housing in the next five years. Cell phone service is down to a penny a minute, and Bharti Airtel, with 135 million wireless customers in India, is signing up 20 million newcomers every month, says the carrier’s CEO, Rajan Bharti Mittal, who attended the Yale confab.

India has an estimated 50 million entrepreneurs, and all of them own their own companies. That compares with a few million in China, where multinationals dominate and the government seems to own a stake in almost everything, says Amit Mitra, secretary general of FICCI (the Federation of Indian Chambers of Commerce and Industry).

Almost 90% of all tech exported by China, and 56% of all exported products (not just tech), is made by multinational corporations, Mitra says. By contrast, only 2% or 3% of India’s exported products is made by corporate titans; tiny companies provide the vast majority of the nation’s output.

Mitra and Mittal believe their homeland will soar forth because India is building itself in the American entrepreneurial mode. Some Americans in the Yale audience, however, were wondering what had happened to that kind of can-do attitude in the U.S.

Mark Fields, who runs the Americas business for Ford Motor , said executives must focus on “not being a victim. Embrace change as opportunity.” Sure, economic data may be contradictory and volatility may be rising. When Ford numbers-crunchers pore over all the economic numbers, they figure U.S. car sales should be 2 million higher than the 9-or-10-million levels of late.

But why fret? “The numbers are just inputs for us. Our job, as a management team, is to have a point of view and manage those risks,” Fields says.

Place your bet, in other words. Like I keep telling you, guys: We’re gonna be OK.

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