Fundamental data on the economy is not 100% bearish. Some data is, some data isn’t. Of course, naysayers will point out that the positive data which has been released can have holes poked in it by astute economic practitioners, but the converse is true as well. So what’s the moral for investors? Don’t become so devoted or attached to one particular viewpoint that you forgo, marginalize, or flat out ignore, fundamental data which finds itself opposed to your pre-conceived market view.
We all know these types of people. Larry Kudlow is a perfect example of someone who is so incredibly committed to a particular viewpoint (in his case bullish optimism) that he attempts to marginalize any and all data that goes contrary to his endless supply of bullish optimism. Come to think of it, I can only think of one or two times in the past year that Larry has ever flat out admitted that X data is actually bad and no positive spin can even be attempted. Make no mistake; there are an absolute ton of “perma bears” out there as well. You know the type– the sort of people who argue the world is going to enter a massive depression, fiat currencies will disappear, and 9mm bullets (or shotgun shells for the less skilled marksmen) and/or water will be the only true store of value.
I am reminded of the common quote by J.M. Keynes, “When the facts change, I change my opinion. What do you do sir?” It would serve investors well (myself included) to keep this quote in mind from time to time. The simple fact is markets are dynamic and uncertain–which is to say...WE ALL have the ability to be wrong. What has 4 years of studying investments in college, continuous self-study, and personal experience taught me on this front? Investors and traders who refuse to admit when they are wrong, thus cut a losing position are, in a word, dangerous.
With all that being said, let’s cover some of the good, the bad, and the ugly in the economy.
General Economic Activity Indicators
Figure 1, shown right below, is the historical real GDP growth starting 4 quarters before the “end” of 4 previous recessions as well as the current recession. As you can see, in a historical context, we are approaching a period in which GDP has historically grown higher as each quarter passes.
click to enlarge
Figure 2, shown immediately below, is similar to figure 1, except this graph is for industrial production–and it is monthly vs. quarterly. This graph tells a similar story: we are entering a period of strong recovery in industrial production.
Figure 3, is similar to figure’s 1 and 2 except it is the ISM manufacturing index. (By now, you should be able to see a formatting trend, as all of these graphs are formatted very similar to figure 1 and 2). It has started to flatten out, but it is still on par with the previous recoveries from the last 4 recessions thus it remains safe to say that this...is a good thing.
Figure 6, shown below, is a graph of non-farm productivity. Yes, productivity gains are positive for corporate earnings. However, if (and it is a BIG if) history is any guide, the gains earned from productivity may be approaching an “all played out” stage.
Business inventories, as shown below by Figure 5, are a monumental drag on the economy. October data was a modest positive, as inventories actually gained 0.3%. But a single data point is not a trend. This trend is horrid and even if the rate of decline slows…each negative data point marks a bad sign.
Figure 7, is a graph of personal consumption which has begun to move higher, and in the historical contexts of the previous 4 recessions, is about to enter a period in which personal consumption trends higher. Considering the U.S. economy is largely a consumer driven economy, this as they say…is a good thing.
Figure 8, is a graph of disposable income. It has been lagging to date, however it might very well start to trend higher. Granted disposable income, in this situation, is probably directly influenced by the daunting unemployment rate keeping downward pressures on wages. But for now it is trending somewhat higher…and as such it should be in the good camp.
Figure 9, is not so pretty. The upward trending consumer consumption data, shown by figure 7, does not appear to be translating into retail sales. As such this particular sector might see some usual seasonal boost by Christmas shopping, but I wouldn’t want to be a retailer relying on much after this traditionally strong period.
Consumer credit, shown in figure 11, is in a downward trend and qualitatively has very little hope of ending anytime soon–given the deleveraging of the entire system. This is a bit of a mixed bag in the sense that as consumer credit declines, the “consumer” becomes much more inherently stable, but on the other hand…de-leveraging provides substantial negative forces to the overall economy.
The Labor Market
The boost in industrial production, shown in figure 2, is translating into increasing average weekly hours in the manufacturing sector, which is shown by figure 17. This is without question a positive. It seems more likely that companies will increase their hours for their employees before they begin increasing their head count-So maybe this is a precursor to an improving employment scenario.
Non-farm payrolls, as shown in figure 13, are still trending downward. The rate of decline is almost a moot point. Every decline is a decline, and a decline in non-farm payrolls is a bad thing for a lot of people, as well as the macro-economy.
Figure 15, the unemployment rate, speaks for itself. It has been steaming higher, and until there are some major policy changes or extremely positive shocks to the economy, this trend is not likely to reverse. Even an unemployment rate that remains flat, at 10%, is a very negative fundamental factor for the U.S. economy–make no mistake about it.
Housing and Construction
Single family home sales, according to Figure 20, have been increasing. In a historical context of previous recessions, this trend is not likely to stop. This is a good thing, so long as some lending standards are being applied (which is not necessarily the case), as it will help clear out excess inventories which were built up in the housing bubble.
Housing starts, shown in Figure 19, are sort of a mixed bag. It appears to be rolling over, which is not good. However, there is a bit of a positive element to this...if housing starts will remain flat, the inventory overhang will continue correcting itself which is ultimately healthier for the overall economy anyways.
Non-residential construction, which should include commercial real-estate, is in shambles and it doesn’t look like it will be improving anytime soon. Moreover, judging by 3 of the past 4 recessions, non-residential construction usually struggles to find its footing for quite some time after the end of each recession. This time it will probably not be any different, and may in fact be far worse.
In summation, investors and traders should be open to new facts as they come out. I hope I have shown that there is a mixture of positive and negative data out there, and all of it is worth considering when evaluating investment decisions. As an investor or trader it is important to not be so devoted to a single perspective that you fail to properly evaluate new facts. Admit when you are wrong and move on.
Disclosure: No positions in any companies mentioned in this article. Long FCX, PCU, VALE, PSEC, ETV, CNO, AGCO and FAX.