Thursday, December 22, 2011

More good news

Third quarter GDP today was revised down by a few billion dollars, but that's old news. The more recent news provides more evidence that fourth quarter growth will be stronger, and the U.S. economy continues to beat the market's rather dismal expectations. 

Seasonally adjusted unemployment claims once again surprised the market by coming in lower than expected (364K vs. 380K). This is the best reading we've seen since the recovery got underway, and at the rate we're going we should see further declines in claims in the weeks ahead. Businesses have pared costs and employees to the bone, so they are likely to fire a lot fewer people than usual as the holiday season winds down.

The ongoing decline in claims is an excellent indicator that the outlook for the U.S. economy is improving, so we should also see the equity market forge ahead to higher levels, as this chart suggests.

The ongoing decline in implied equity volatility (the Vix index) also argues for higher equity prices. With the news showing that the U.S. economy is not only not deteriorating but actually improving, despite the anguish in the Eurozone regarding PIIGS defaults, this removes an important source of uncertainty, and less uncertainty is almost always good for equity markets.

I'm usually reluctant to place much stock in the Conference Board's Leading Indicators, but they do not even remotely suggest that the U.S. economy is in trouble. Fourth quarter real GDP growth is now looking to be in the 3-4% range.

Consumer confidence usually lags reality, so the somewhat stronger-than-expected increase in the December Michigan Consumer Confidence survey reported this morning is simply confirmation that things haven't turned out as bad as most people were expecting. Confidence has picked up of late, but it is still at extremely low levels from an historical perspective. That's the recurring theme we've been seeing since last summer: markets and consumers were braced for a serious deterioration in the economic outlook, yet the economy has actually managed to improve somewhat. But the market is still climbing walls of worry, since on balance the market is not yet even slightly optimistic about the future. After all, we have yet to see the fallout of the Greek default which will almost certainly happen soon.


Benjamin Cole said...

Excellent survey and analysis by Scott Grannis, a light upon the economic scene,

Investors and real estate buyers: Remember, buy when most are cautious. Buy when it looks bleak.

If you wait until all signals are will end up like commercial banks, who are eager to lend whenever there is a many year, sustained rally in real estate. Then, they want to lend, and the timid want to buy. Then is the top.

Buy now, and (with leverage) I sense you will see doubles and tripes ahead. More if the Fed would promote growth.

brodero said...

Watch the jobs market when the 52 week moving average of nonseasonally adjusted jobless claims breaks 400,000.The average
is around 407,000 and dropping at
a pace of 700 to 1,000 a week.

Gene Prescott said...

Thanks for posting more good news. I like the charts. As you, and others know, sometimes I comment on the scales used in charts not always projecting a correct 'visual picture.' Recently I encountered an extreme example, so I made a post on my blog. Currently it is the eight post down. You can also locate it by the title "Perception" in the December 2011 posts (scroll down left). The blog posts links to a PDF (the actual example) posted on my SkyDrive. You can download it, and view or print with Adobe.

Gene Prescott said...

Ooops. Link to my blog is:

Scott Grannis said...

Gene, thanks for the comment. I'm always mindful of your admonitions when preparing my charts, and I take pains to avoid misrepresenting things.

brodero said...

When the 52 week moving average of
NSA jobless claims breaks 400,000...1 year job growth is between 2500 to 3000...

Lara said...

How does US labor participation impact the analysis?

Lara said...

Do you ever consider US labor participation in your analysis?