More progress on the employment front

Weekly claims (seasonally adjusted) have dropped rather dramatically in recent weeks. That's because on a non-seasonally-adjusted basis, claims have not risen as is usually the case around this time of the year (they've actually been flat since March). It's good news that more people are not being laid off as usual, but it doesn't necessarily mean that employers are hiring. Still, the ADP job estimate yesterday, coupled with the strong ISM employment report, suggest that we are likely to see a modestly rising trend in jobs for the foreseeable future. Thus, we may see a positive surprise in tomorrow's jobs data, with expectations of private payrolls currently at 158K. Whatever the case, I think it's clear that the employment scene has been gradually improving for most of this year and is likely to continue to do so.

Construction activity remains weak

Construction spending was a bit strong than expected in October, but from the looks of this chart, construction activity is barely holding its own. Residential construction is now at a record low 2.2% of GDP, while nonresidential construction has fallen 10% in the past year.

Manufacturing sector continues to improve

The November Purchasing Managers' Index of manufacturing came in about as expected, and continues to suggest that we will see a pickup in GDP growth in the current quarter. The current level of the index is consistent with Q4 GDP growth of 4% or so, judging from past correlations.

Encouragingly, the employment index remains at relatively high levels, as does the export orders index. Meanwhile, 69.5% of those surveyed reported paying higher prices, marking the 18th month in a row that a majority has reported doing so, and further bolstering the view that deflation risk is almost nonexistent.

The "forces of recovery" have been slowly building for the past 18 months, and in my opinion will not be easily derailed. Left to its own devices, the U.S. economy has a strong propensity to grow, and it has been growing despite the fierce headwinds of fiscal and monetary policy. Fiscal policy, while termed "stimulative" by politicians, has actually been restrictive, since it has borrowed massive amounts of funds from the private sector in order to feed an inefficient public sector, bolster unions, and fund a modest increase in public works. In the process, it has raised the specter of a massive future increase in tax and regulatory burdens, discouraging private sector initiative. Monetary policy has also been termed "stimulative," but so far it has only resulted in a weak dollar and fears of rising inflation, both of which dampen private sector investment by increasing uncertainty.

Going forward, I think there is reason to expect that fiscal and monetary policy will become less "stimulative," and thus allow the economy's natural recovery instincts to gain more traction.