Economic Factors Pointing To 2012 Growth

On December 6th, 2011, posted in: Economic News, Newsletter by

We have all watched with amazement as Europe has twisted and turned around the falling visages of socialism as it wracks its death knell on government intervention. If ever the world needed evidence socialism does not work, the European test tube is a great example. Unfortunately, the death throes have had a telling impact on the US economy and the stock market. As a result, we have seen the market react even though the economy has shown signs of life.

Payroll Increases

Payroll Increases

If you have followed this newsletter in recent months, you will remember I have consistently pointed to major economic indicators that the economy is pulling out of its downturn and said a double dip recession is not currently evidenced by the metrics. As you will see, the newest data further supports the upward trend of the economy. Here are but a few of the indicators.The most recent labor statistics show private payrolls increased 120,000 in November with even stronger evidence coming from upward revisions for September and October to 180,000.These upward revisions have been a recurring pattern for the entire year. As an example, private payrolls for September originally were reported at +137,000 but were then revised to +220,000. Remember when the August nonfarm payrolls were initially reported at ZERO but then revised up in September to 57,000 and further revised in October to +104,000 jobs.

Civilian employment, an alternative measure of jobs which factor in small business start-ups, increased 278,000 in November and has been up an average of 178,000 the past year

The gain in civilian employment helped push the unemployment rate down to 8.6%. However, don’t be fooled by this reported drop in the unemployment rate. It was MORE due to the 315,000 people who dropped out of the labor force (people working or looking for jobs). This brought the labor participation rate down to 64%.It was 64.2%.So the 0.2% drop equals 315,000 people leaving the workforce.

What that means, is there are now 315,000 fewer jobs to have, so the universe of jobs has been steadily shrinking. What was the number of jobs created? It is 120,000 jobs. That number of jobs created can lower unemployment rate 0.4%, almost one half of a percent? Creating 120,000 new jobs could not have a 0.4% impact. This is a strong indicator of the shrinking labor force participation rate. But don’t be surprised if this is seasonal and when they re-enter the work force in January, the jobless rate suddenly increases. Notice the chart. The largest increase in employment came in the retail sector. This is typically a seasonal employment due to the Holidays.

Another cautious note regarding unemployment: the most recent report showed average hourly earnings dipped 0.1% in November. (However they are still up 1.8% from a year ago.) The combination of the hourly increase along with a reported 2.1% increase in the number of hours worked, means total worker earnings are up 3.9% from a year ago. Couple these changes with a slowdown in the pace of debt reduction, it shows consumers are diverting income to spending, a sure sign the economy is expanding, at least for now.

Here is some GOOD NEWS! The ISM manufacturing index increased to 52.7 in November from 50.8 in October. This beat the consensus gain by +.09. (Levels higher than 50 signal the economy is expanding; levels below 50 signal contraction.) Component measures were mixed but remain well above 50. The production index gained to 56.6 from 50.1 and the new orders index rose to 56.7 from 52.4. The employment index slipped to 51.8 from 53.5. Only the supplier deliveries index declined below 50, to 49.9 from 51.3. The prices paid index increased to 45.0 in November from 41.0 in October.

Implications: All and all, this is very good news for manufacturing and construction.The manufacturing sector has now grown for 28 straight months and was stronger than the consensus expected. On an even more optimistic note, new orders came in at a very strong 56.7, increasing for the second consecutive month after falling for three consecutive months.

The one sub-index that remains weak is inventories. Manufacturers are still reluctant to accumulate inventories. This is stifling growth in the short term, but should add to growth in the future.

On the inflation front, the prices paid index rose to 45.0 in November. A reading below 50 is a welcome sight, but this is not expected to last. With monetary policy so loose, it is likely the inflation impact will continue to grow.

Construction increased 0.8% in October and was up 1.4% including revisions compared to prior months. October growth in construction activity was led by home improvements, power plants, and office buildings. Upward revisions to past months show stronger home building and commercial construction.

New claims for unemployment insurance increased 6,000 last week to 402,000. The four-week moving average is 396,000 versus 440,000 in April/May. Continuing claims for regular state benefits rose 35,000 to 3.74 million. It is anticipated the next official Labor Department report will show private payrolls will be up 125,000 in November.

In other recent news, automakers sold cars and light trucks at a 13.6 million annual rate in November, up 2.8% from October and 11% from a year ago. The economy is still far from operating at its full potential, but it is clearly moving in the right direction.

Meanwhile, reports on consumer spending and manufacturing production keep signaling growth. Auto sales – big-ticket items people shy away from when they anticipate recession – hit 13.6 million in November, the best pace since early 2008 (except for “cash for clunkers,” when the government was cutting checks of $4,000 each to buy a vehicle). Industrial production is up 4.5% from a year ago.

Even the housing market is starting the long path back to normalcy. So far this year, multi-family builders have started 45% more homes than they did in the same time frame in 2010. And permits to build single-family homes are up 5% from a year ago.

About the Markets

2012 Growth Table

Past performance is no guarantee of future results. Indexes are not available for direct investment.

The markets made a remarkable rebound at the end of November, after having dipped 5% during the month and finished up about 2% overall. This put all the markets into positive territory for the year. The Dow (+3.11%, +0.11%) is barely positive for the year, but both the S&P 500 (-0.24%, +3.03%) and the NASDAQ (+0.27%, +2.96%) are firmly rooted for the final month. Unless something catastrophic happens in Europe, it is likely they will be positive for the year.

Notice the Small Cap Value market (measured by the DFA Small Cap 6-10 fund) is up 9.15% for the year, demonstrating the power of that market, even in these tumultuous times.

The markets seemed willing to accept every new promise for reform Europe offered to the consuming investors. During last week, those promises included strengthening the Euro zone bailout fund, more bond buying by the European Central Bank (ECB) and Germany floated the possibility they would agree to the issuance of “Euro Bonds.”

If Europe doesn’t actually carry through on some or all of these promises, the jolt to investors will throw the markets into negative territory again. Even so, interest rates for Spain’s and Italy’s debt continue at very high levels. Factored into all of this the length of time it will take to fulfill some of these promises. It could take years. The markets will not respond well to these delays if the feel the politicians are not serious.

Treasuries moved up this week by about the same amount they fell last week. That makes it hard to assess whether the Fed’s “Operation Twist” is having any real impact on interest rates. T-bill rates went negative again at the end of the week driving returns down for investors in money-market funds.

Crude oil closed $100 per-barrel mark, but gasoline prices continued their downward trend. Speculation is driving the oil markets, not supply-demand.

Bottom Line: With just four weeks to go until year-end, it’s likely the markets will close out 2011 just about where they started. It is unfortunate, but with the political impasse in Washington, it is unlikely anything positive will change until the election is decided. If business wins, the whole tenor of the market should go positive. If business loses, we could be in for four more years of the same doldrums. Strong corporate profits, hefty cash positions, and reasonable valuations (relatively low P/E multiples, for example) don’t seem to impact investors as it has in the past. Fortunately, there does not seem to be a huge unknown bubble lurking in the weeds, at the moment. So expect the election year uncertainties, political gridlock in Washington and continued dithering in Europe to keep things in flux.

Even so, the stock market is more undervalued today than it was at the height of the panic in March 2009.

Using a capitalized profits model to value stocks, (dividing corporate profits by the 10-year Treasury yield), we can determine the current level of this index to that from each quarter for the past 60 years. It is an estimate an average fair-value. Here is what we find. The 10-year yields are very low (2.1%), but corporate profits are at a record height. As a result, this model says the fair value for the Dow should be 45,000. As you know, it is currently at 12,167. Why?

It is largely due to artificially low interest rates. If we use a more realistic discount rate of say 5% for Treasury yields, we get a fair value of 19,500 on the Dow and 1,980 for the S&P 500 (compared to 1265.)

As we’ve said before, there are many factors impacting this model. Interest rates could go higher than 5%, profits could fall or both could happen. Profits, for example, are now 13% of GDP, the highest in measured history (going back to 1947) except for one quarter in 1950.

So what happens to the model if profits revert to the historical mean of about 9.5% of GDP? Even so, and assuming a 5% yield on the 10-year Treasury, fair market value is 14,200 for the Dow and 1450 for the S&P 500.

If you go back to March of 2000, an ounce of gold could get an investor fewer than 4 shares of Intel (INTC).Today, gold is trading for about 70 shares of Intel. All the while, Intel is yielding around 3.4% and gold yields nada. Stocks are dirt cheap, relative to bonds and relative to gold.

Having said all this, it would be great to know the exact moment all the bad news from Europe will finally blow over. But no one knows, of course. Investors have a simple choice. Do they want to buy stocks when they are dirt cheap or wait until the market rebounds and pay more when the fear disappears?


This is the website for the Philadelphia Federal Reserve Bank Forum. –You may want to read what was said related to the current status of the economy, including other data and analysis the bank offers.


A report from the U. S. Commerce Department indicates 2011 could be the worst year for new home sales since they started keeping records in 1963. Reported sales for 2011 are expected to be 307,000 units. This is fewer than the 323,000 homes sold in 2010.

This newsletter is compiled from various sources. The composite is meant to give a broad overview of trends and facts related to the economy and the markets. We hope it is helpful.



This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.





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