The Dow topped 14,000 for the first time since 2007, and the S&P closed above 1500. These two indexes are now up 6.9% and 6.1%, respectively, year-to-date - foiling the Doomsday crowd once again. January closed up over 5% in both indexes, and February began with a bang on Friday, despite a seemingly weak jobs report and a depressing 0.1% drop in the "flash" report on U.S. GDP for the last quarter of 2012. But the real story is that both of those numbers look far better in the details than in the headlines.
Misleading Stat #1: Jobless Rate Rises to 7.9% vs. 600,000 New Jobs in Three Months
The employment report was "mixed." On the plus side, we saw huge upward revisions to the previous two months of job creation. December was revised up to 196,000 jobs (from 155,000), while November shot up even higher to 247,000 jobs (from 161,000). That's 127,000 more jobs than previously reported and a total of 600,000 net new jobs in the last three months, since January's payrolls added 157,000 jobs.
Due to the early date of Friday's report (February 1), we are likely to see positive revisions next month. Going back further, the Labor Department found an additional 335,000 jobs in 2012 and 175,000 in 2011, so we have created over 4.2 million new jobs in the last 24 months - an average of 178,000 per month.
On the negative side, the unemployment rate for January rose a notch to 7.9%, and the average workweek was unchanged, at a downwardly revised 34.4 hours. Furthermore, the average retail workweek fell to a three-year low of 30.1 hours, down from 30.4 in December. This might be due to many employers wanting to avoid paying mandatory healthcare for their staff working over 30 hours per week.
I should also add that on Wednesday, ADP reported that 192,000 private sector jobs were created in January and job growth improved in all major sectors, except for manufacturing, which lost 3,000 jobs.
The job market is definitely on the road to recovery, and the Fed has promised to keep pumping money into the U.S. economy until unemployment falls to 6.5%, a number which still seems a long way away.
Misleading Stat #2: Total GDP Contracts 0.1%, but Key GDP Components Soar
With most major statistics, you can add a positive spin (like 600,000 new jobs a quarter) or a negative spin (i.e., the jobless rate rose to 7.9%). The press tends to choose the negative spin (bad news attracts more readers), but I also like to cover the equally important positive side of the number. A fair-minded view of both sides is vital to a full understanding of our economy, so let's turn to the latest GDP report.
Last Wednesday, the Commerce Department announced that their preliminary estimate for fourth quarter GDP declined 0.1%, which was far worse than the economists' consensus estimate of a 1.0% increase. The primary reason for the sharp plunge is that government spending fell from a 3.9% surge in the third quarter to a 6.6% decline in the fourth quarter. However, a decline in government spending is good news.
Inventories also tightened in the fourth quarter, putting a drag on GDP growth, but these inventories must be replenished, so that bodes well for stronger first quarter 2013 GDP growth. In addition, the best news I can see from the fourth quarter GDP report was that consumer spending rose to a 2.2% annual pace, up from an annual rate of 1.6% and 1.5% in the previous two quarters. And there's even more good news: Business capital spending grew at an annual rate of 8.4% after falling 1.8% in the third quarter. In brief, both business and consumer spending were strong and government spending slowed.
There's more good news in other GDP-related indicators. Last week, the Commerce Department reported that orders for big ticket items surged by 4.6% in December, partly due to a 10.1% surge in commercial aircraft orders, offsetting a 0.4% decline in vehicle orders, as the automotive industry is showing some signs of weakness. Excluding volatile transportation orders, durable goods orders rose 1.3% in December.
Another encouraging report came Friday when the Institute of Supply Management "ISM" manufacturing index surged to 53.1 in January, up from 50.2 in December, soundly thrashing the economists' consensus estimate of 51. Fully 13 of 18 industries improved, led by plastics, textiles, and furniture. Also, the ISM new orders index surged to 53.3 in January, up from 49.7 in December. An even bigger surge was ISM's inventories index, reaching 51 in January, up from 43 in December. Since any reading above 50 signals an expansion, the dramatic improvement in ISM figures signals a strong start for manufacturing this year.
Overall, the U.S. economy is in far better shape than the headline numbers imply - which is one main reason why the stock market is starting 2013 with a bang, setting new five-year highs almost every week.
The Fed's Likely Policy Response to these Two-Sided Statistics on Jobs & GDP
Since the economic news last week was clearly "mixed" (negative headlines, with positive details), the Fed can be excused for being conflicted on how to respond. Since unemployment is still 7.9% and the Fed said it would pump $85 billion per month into the financial markets to keep interest rates ultra-low - at least until the jobless rate hits 6.5% - the Fed will probably keep to that policy for at least the rest of 2013.
The big debate at the Federal Open Market Committee (FOMC) meeting last week was about when, and under what circumstances, the Fed might start to tap the brakes and slow down its $85 billion per month in quantitative easing and yield curve manipulation via Operation Twist. Even though the FOMC minutes will not be released for a few weeks, fireworks likely erupted, since the increasingly outspoken hawks - like Dallas Fed President Richard Fisher - have pointed out that endless easing has become ineffective.
The other argument is that the Fed has to help "monetize" much of the new government debt that is being pumped into the financial markets due to deficit spending. This argument, led by the doves that dominate the FOMC, has been winning. In Wednesday's FOMC statement, the Fed said it would keep pumping $85 billion per month into mortgage-backed securities and Treasury securities, regardless of the toll this is taking on the U.S. dollar and the inflation that typically follows a weakening currency. The U.S. dollar is now at a 14-month low against the euro, and commodity prices are rising, due mostly to a falling dollar.
The truth of the matter is that when unemployment finally hits 6.5%, the Fed might be so addicted to its current "five year plan" (i.e., late 2008 to late 2013) of easy money that it will continue quantitative easing "forever." The good news for investors is that all this money that the Fed is pumping into the bond market is now spilling into the stock market. In all likelihood, this policy will continue for the next couple of years - helping push the stock market to new all-time peaks, perhaps later this year.
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