Thursday, October 3, 2013

Eurozone economy picks up

If anything stands out in today's ISM service sector report, it is the pickup in the Eurozone. The Eurozone economy is clearly picking up, after suffering from a two-year recession. This improves the outlook for the global economy, and removes one of the many drags on the U.S. economy.

The U.S. service sector report was a bit weaker than expected (54.4 vs. 57), but it's been jumping around for the past several years so that is not unusual. As the second chart above shows, conditions in the service sector have been modestly positive on average, and last month's report was only modestly lower than the post-recession average. While there are no big changes underfoot in the U.S. economy, the Eurozone economy is experiencing a welcome revival, and that is big news on the margin.

Announced corporate layoffs have been very low for the past three and a half years. No sign of any deterioration in the outlook here.

Weekly unemployment claims have fallen significantly over the past several years, and are now about as low as we could hope to see. An important part of every recovery is the tightening of business belts: cutting costs, laying off nonessential personnel, scaling back expansion plans, etc. It's good to know that process is now essentially complete. What's missing, of course, is the scaling up of expansion plans and a wave of new hiring. That's going to require a better policy environment, and unfortunately we're not likely to see one any time soon, unless Obamacare is postponed for another year and revamped in the process.

The threat of another recession is still very low, and thanks to the pickup in the Eurozone, there is more reason to remain optimistic about the future. With the yield on cash still stuck at zero, it's thus very difficult for investors to justify a defensive posture. Sitting in cash can only be rewarded if economic conditions deteriorate more than is already priced in.

As the three charts above suggest, the market is still braced for very week growth conditions. PE ratios today are about average, even though corporate profits are at all-time highs—a clear indication that the market expects the corporate profits outlook to deteriorate. 5-yr TIPS real yields are still negative, which suggests the market expects U.S. growth to be very weak for the foreseeable future.


McKibbinUSA said...

Both the Eurozone and the US have political and civil unrest issues that will trump economics in the coming years -- here in the US, I believe that the US government will remain closed for the remainder of Obama's term of office -- let's face it, neither the Republicans or Democrats are going to give in on the Affordable Care Act -- however, I also believe that the Democratic party is better positioned to survive a long-term government closing that will last upwards of 3-5 years -- conversely, the Republican party as we know her will implode, and Sens Cruz and Paul will pickup the conservatives pieces by forming a wholly revised Libertarian-bent party that will insist upon the termination and/or privatization of all entitlement services before reopening a much reduced government machine -- the end game is the takeover of the Congress and Presidency by Libertarians who will terminate/privatize all entitlement services, as well as limit military spending to homeland defense on US soil requiring redeployment of all US troops back to the US as a condition to reopening the government -- said another way, the US is about to implode and casualties are imminent -- this situation is great news for accredited investors who hold dividend and rent-earning equities, and terrible news for everyone else who should be under cover in keeping a watchful eye out for the four horsemen of the apocalypse.

Benjamin Cole said...

Nice wrap up. The drop in new unemployment claims suggest that anyone who could be laid off has been laid off.

All-time record high corporate profits---by all measures too, absolutely or relatively---are a sign of health. If Corporate America can make money now, they will always make money and lots of it.

It is a sign of Obama's immense obtuseness that he never honks about record corporate profits on his watch, that easily eclipse those we had under Bush jr.

From here we just need stronger aggregate demand.

The Fed should print, baby, print. Inflation is also at record lows, btw, with the PCE core headed towards 1 percent.

McKibbinUSA said...
This comment has been removed by the author.
McKibbinUSA said...
This comment has been removed by the author.
Kurt said...

So whatever happened to the PIIGS issue and all the hand-wringing that surrounded it?

Scott Grannis said...

The PIIGS crisis faded away as expected: