By Carlos Guillen
After finishing yesterday's trading session nicely in winning territory, stocks are pushing for more gains yet again today, but more encouraging is that the Dow Jones Industrial Average broke above the infamous 14,000 psychological resistance level yesterday and today the index has held very firmly with very little indication of going below the mark. The modest gains made so far during the first half of trading came on some mixed economic data points.
Initial Claims data posted earlier today was very encouraging as it showed a sharper than expected drop in the number of people filing for unemployment benefits. According to the Department of Labor, initial claims during the week ended February 23 totaled 344,000, decreasing from the 366,000 revised figure reported for the prior week and landing below the Street's estimate of 360,000. The fact that the number broke below 350,000 is certainly encouraging, but this has been the case several times before, only to jump back above. The initial claims' four-week moving average was 355,000, decreasing from the prior week's average of 361,750. While this metric is showing that it is stabilizing at the moment, it is finding some difficulty falling below 350,000, which is where economists see stronger jobs growth. So far it is becoming apparent that the jobs market is reaching a point of stagnation, which is that there are less layoffs but there is also less hiring.
Clearly, the most negative bit of economic data today was that gross domestic product (GDP) came in worse than expected. According to the Bureau of Economic Analysis, real gross domestic product during the fourth quarter of 2012 increased quarter-over-quarter by 0.1 percent (annualized), worse than the Street's consensus estimate calling for a 0.5 percent quarter-over-quarter rise and much lower than the 3.1 percent growth posted for the third quarter. On the positive side, it was very encouraging to see that consumption increased 2.1 percent, making 12 quarters of consistent growth. However, a sharp drop in government spending and in domestic investment more than negated the positive contribution from consumer spending. Although this result is rather backward looking and a lagging indicator, it is still a disappointment to see debilitating economic growth.
Perhaps serving to counter the perception of slowing U.S. economic growth, data from ISM-Chicago showed that the region was expanding at a faster rate than expected. February Chicago PMI increased to 56.8 from the 54.0 level reached in the prior month, landing above the Street's consensus of 54.0. It should be noted that levels above 50 signify growth, so the result means that the region's manufacturing industry is now into its third month of expansion. So far, overall economic indicators have been rather mixed; a broader economic measure of manufacturing comes out on tomorrow, and this should shed more light on the degree of growth in the U.S. economy.
At the moment equity markets are running smoothly with some bits of indication that it wants to go higher, quite amazing indeed.
Kansas City Fed-Up
In case you need any evidence that this whole sequester nonsense is holding back the economy, here you go. The Kansas City Fed manufacturing index tumbled to a reading of -10 for February versus -2 for January, and below the -1 consensus. The survey responses quite clearly portrayed caution ahead of the automatic government spending cuts (which at the moment look highly likely to go through). Consequentially new orders and backlog fell to their worst levels since early 2009. Strangely, employee count went positive for the first time since September, but the average workweek was the worst since 2009.
On one hand, there were responses from the likes of military suppliers who say they expect less business, and are reducing spending accordingly. But for the most part, much of the slowdown appears as though it is simply uncertainty as to what will happen. One survey respondent noted, "We are not sure what the effects of the sequestration will be, so as a result, we are delaying nearly all spending and hiring plans." In the latter case, you could say that it makes sense not to make any big business plans before you know what's going to happen, and in a sense you can't blame the companies for slowing down. Yet, it's the kind of thing you could see reversing once those companies know exactly what will occur, and can budget accordingly.
For the moment, a deal on the sequester looks a long way off with the Friday deadline looming. Yet the market almost seems to have come to grips with it, and really doesn't seem very fazed by it, judging by the past few days' action.