The economic data last week continued to defy the prognostications of impending economic doom. The vast majority of the reports were better than expected – although not good enough to disperse the Occupy (insert your city here) protestors. Based on the rate of improvement in the employment statistics, the occupiers encamped down at Wall and Broad may want to consider a more permanent form of housing. The economy produced a measly 103,000 jobs in the month of September and while that was better than Wall Street’s crystal ball gazers predicted, it isn’t nearly enough to thin the ranks of patchouli wafting citizens who’ve taken up residence in the financial district.
One can’t help but sympathize with the protestors even if one doesn’t approve of their methods or personal hygiene choices. This group is not dissimilar to the original Tea Party folks who were aroused more than anything by the TARP bill that bailed out the firms the current demonstrators so loathe. The only real difference between the two groups is that the Tea Party crowd places the blame about 200 miles southwest of Wall Street. If Rick Santelli hadn’t given them their name, they could have just as easily been called Occupy Constitution Avenue. Occupy (insert your city here) blames the bribers while the Tea Party blames the bribees. One thing both groups seem to agree on is that the Federal Reserve deserves a large share of the blame and that is reason for hope. We may never be able to agree on whether politicians or corporate lobbyists are the more loathsome characters in this American economic passion play but the Fed could provide a focal point for the anger felt by people of all political persuasions.
Conveniently, both groups’ distrust of the Fed is well deserved. The credit that allowed government to become so large and therefore critical to the business plans of corporate mendicants – with alms of favors distributed by Republicans and Democrats alike – would not have existed but for the vigorous efforts of Alan Greenspan and Ben Bernanke. As we are now seeing in Europe, sound money places a limit on the public purse. Without the ability to devalue the Euro for their own purposes, the periphery countries are now being forced by the market to reduce the scope of government at just the time it is most needed to fulfill its basic functions. The United States is not immune to this market discipline as the decline of the US dollar over the last decade proves. The bailouts of 2008 were not the beginning of our current economic decline; they were merely the logical and ugly end to a carnival of corruption enabled by a pliant Federal Reserve.
Despite the interference of the Federal Reserve and the government venture capitalists who brought us Solyndra, the US economy has yet to fully succumb to the sclerotic disease that has brought Greece to the brink of default. The entrepreneurial nature of the US economy, as embodied in the now departed Steve Jobs, is alive, if not exactly well. Whether that continues to be the case may well depend on the Tea Party and the Occupiers uniting behind the common goal of reforming the Federal Reserve. We won’t drain the swamp in DC until we stop the flow of dollars emanating from the Federal Reserve. Occupy the Marriner Eccles Building! (Boy that doesn’t exactly roll off the tongue…)
While we wait for the merger of protest movements, we are stuck with the economy we have, which isn’t great but according to the most recent data still doesn’t qualify for recession status either. As I’ve been pointing out for weeks now, the data does not support the fear apparent in markets. Either the markets are wrong – and there is an old saying on Wall Street that the market has predicted 9 of the last 4 recessions – or the economy is about to dive like its 2008 all over again. I’m not one to play the hero so I’m not making any big bets either way, but I find it hard to believe that we’ll re-run 2008 again so soon. Sequels generally don’t live up to the original anyway and the market would seem to have discounted a worst case scenario at this point.
If we are headed back into recession, someone forgot to tell the public they weren’t supposed to buy a new car. Auto sales were up 8% to a 13.1 million rate in September. That is after a lousy August and still way below the 17.5 million rate seen at the peak but it is also well above the trough under 10 million. Shoppers also continue to spend at the retail level with both Goldman and Redbook still showing year over year same store gains of 3-4%. Chain store sales also continue strong with gains of +5% year over year.
Construction also made a bit of a comeback in August, up 1.4% led by a jump in public construction. Private residential and non residential also showed gains, although residential only partially rebounded from a very bad reading in July. Construction employment also showed a gain in the payroll report Friday, but at least some of that was probably due to repairs from the recent hurricane. Construction spending is still well below the peak of a few years ago but it is now showing year over year gains and that is good news that shouldn’t be discounted.
Manufacturing has definitely slowed this summer but companies have used the drop off in new orders to fill their backlogs. The ISM manufacturing survey was better than expected at 51.6 but the components are worrisome. New orders were under the 50 level but just barely at 49.6. With backlog orders down to 41.5 that better pick up soon or the employment component will likely fall from its recent 53.8. One sliver of hope on that front was a rise in the export order component to 53.5. Factory orders confirmed the slowdown falling 0.2%. It wasn’t that bad a report though with capital goods orders rising strongly. That actually bodes well for future GDP. Inventories at the wholesale level were up 0.4% in August while the stock to sales ratio stayed at a lean 1.16.
The non-manufacturing ISM was also better than expected at a solid 53. New orders were up to 56.5 and backlog – in what may be a leading indicator for the manufacturing version – rose back above 50 (52.5) after three months in contraction territory. Unfortunately, that didn’t translate into jobs with the employment component falling to 48.7. That was somewhat contradicted by the employment report Friday and it should be remembered the ISM is a survey where respondents may say one thing and do another. The gains in employment in September were concentrated in the service sector, up 119,000 jobs while goods producing jobs showed a more modest gain of 18,000. Wages rebounded by 0.2% after a similar fall in August while the workweek extended by 0.1 to 34.3 hours. The unemployment rate was unchanged at 9.1% as a rise in the workforce was almost exactly offset by hiring. That is the dilemma we face as the current pace of job creation isn’t enough to offset new – and returning – entrants to the workforce. Jobless claims were basically unchanged on the week at 401k. That needs to fall to at least 350k to see more vigorous job creation numbers.
Stocks staged a modest rebound last week with the S&P 500 up 2.1% and European markets generally up a bit more. Emerging markets were basically flat on the week and continue to lag more developed markets. From a technical perspective the rallies don’t mean much. The S&P 500 is still below the 50 day moving average – which is falling – as are almost all the other markets we follow. One exception to that is the US Dollar index which, although down last week, has made a strong move off the bottom and may be in for a sustainable uptrend. That depends to a large degree on what happens in Europe but I see little reason to believe the Euro will strengthen no matter what happens. If the dollar can continue to climb that would also likely mean a continuation of the downtrend in commodities. I think that has been a factor in the resilience of the US economy recently and would like to see it continue.
As I said above, markets appear to have discounted a bad outcome in Europe and a subsequent recession. If that turns out to be wrong – and so far it has – we could see a significant rally in stocks from current levels. I’m not willing to make a big bet in that direction yet but we are starting to do some selective buying. We bought two stocks late Friday and have built a list of buy candidates as long as my arm. We haven’t made any moves in the indexes yet and probably won’t until we see better technical conditions but I expect to see that sometime soon. If we don’t get a global recession, I suspect the beta play may be in emerging markets but again, it seems prudent to wait for technicals to improve. Assuming the dollar retains its current allure, REITs and commodities will probably lag but we’ll be watching for a reversal in the dollar. We remain neutral on gold in the short term but our long term bullish view won’t change until we start to see better economic policy. And that doesn’t seem likely anytime soon.
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