Seeking Alpha
Newsletter provider, research analyst, portfolio strategy
Profile| Send Message|
( followers)  

The stock market this week is saying I was wrong in warning in last week’s column that we might already be back in recession in this, the third quarter of the year.

I have to agree that the alarming trend of worsening economic reports since May seemed to turn a bit more mixed with this week’s reports.

On the still worsening side were the further declines in construction spending, and in the Chicago Purchasing Managers Index. Second quarter productivity was revised down to a decline of 1.8%, double the 0.9% decline originally reported. Factory orders rose only 0.1% in July, worse than forecasts, held down by big declines in orders for machinery and computers, areas that it was hoped would take over leadership of the economic recovery after the housing industry collapsed again.

The ISM Mfg Index was a positive, rising only fractionally, to 56.3 in August from 55.5 in July. But it was expected to decline. However, the ISM non-mfg Index, which measures the service sector (which accounts for 80% of jobs in the U.S.) fell to 51.5 in August from 54.3 in July, worse than forecasts, and the lowest reading since January.

And the auto makers reported their sales plunged dramatically in August.

On the jobs front, although the stock market liked Friday’s employment report for August because it wasn’t as bad as forecasts, it was that 54,000 more jobs were lost in August, and the unemployment rate ticked up to 9.6% from 9.5% in July. The economic recovery needs more jobs, not a slower rate of job losses.

But there were a few pleasant surprises. Consumer confidence, although still dismally low, improved slightly, to 53.5 in August from a five-month low of 51 in July. Retail sales were up 3.3% in August, better than forecasts of 2.5%. And pending home sales, although still 19.1% below August of last year, were up 5.2% in August.

So we did have a few encouraging reports this week. But were they enough to offset the negative reports of the week, let alone the deluge of negative reports of previous weeks?

I was particularly discouraged by the decline in the ISM service sector index, and even more so by the plunge in auto sales in August.

Historically, the housing and auto industries drive the economy in both directions, into economic slumps, and back out into good times. That makes sense, since consumer spending accounts for 70% of the economy, and houses and cars are the largest purchases consumers make. Further, in purchasing a home or a car, consumers spend a lot more than the discretionary cash they have on hand, spending large amounts of borrowed money, leveraging their spending by 900% if they make 10% down payments, thereby leveraging their positive effect on the economy.

The government understood that, which is why the two main programs that picked the economy up off the bottom last year were rebates to home-buyers to help with the down-payments on homes, and the ‘cash for clunkers’ program.

So the biggest disappointment for the economy is not the continuation of job losses. Employment is a lagging indicator and cannot improve much until the economy picks up. The biggest disappointment has to be the way that home sales and auto sales have cratered since those stimulus programs expired.

While this week’s report that pending home sales rose 5.2% in August was encouraging, they were still 19.1% below their level of last August, and pending home sales depend on the potential buyer obtaining financing and do not always translate into actual sales.

Meanwhile auto sales in August were a blow to the recovery. A few examples: General Motors August sales plummeted 24.9%, Toyota sales plunged 34.1%, and Nissan sales fell 27%, compared to August of last year. Compared to the previous month (July) GM’s sales were down 7%, Ford’s down 5%, Toyota’s down 12%, and so on.

Meanwhile, even the improvement in a few economic reports, and the stock market’s positive reaction this week, has a downside. It probably slides the hope off the table for awhile that Congress will step in with more stimulus efforts, or that the Federal Reserve will step in with another round of ‘quantitative easing’. With even the minor improvement in economic reports this week the Fed will almost surely stick with its wait and see approach.

So, it was a positive week for a change, but I’ll also wait and see - if the market really believes the mixed reports this week means the economic recovery is back on track.

Disclosure: No positions

Source: Will the Market React to the Encouraging Economic Reports?