The Independent Market Observer

9/28/12 – One Step Forward, One Step Back for U.S. Economy

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 28, 2012 10:26:19 AM

and tagged Fiscal Cliff, Yesterday's News

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The U.S. economy continues to actively stay in one place. The papers reflect this, with headlines like “Numbers Augur Trouble Ahead” and “Obama Trumpets Revised Job Data,” both from page A6 of the Wall Street Journal (WSJ) and both painting very different pictures of where we are. Although the job figures have been revised up—meaning we actually have more than 400,000 more jobs than we thought—slowing growth and a drop in durable goods orders suggest that the future will be worse than expected. Likewise, “Chinese Slowdown Idles US Coal Mines” from the front page of the WSJ talks about how reduced exports and mining employment are hitting the U.S., while “GE’s Immelt Is Upbeat on Industrial Outlook” (p. B3) suggests that the recent industrial and manufacturing slowdown is in fact overdone. But there is cognitive dissonance within the GE article itself, with an acknowledgment that FedEx and Caterpillar are much less sanguine about the future.

The New York Times (NYT) is just as visibly conflicted. “Fearing Fiscal Cliff, Investors Cash In and Seek Safety” (p. B1) is right next to “Economy Still Weak, But More Feel Secure.” A follow-up article, “Good News and Bad in New Data on Economy” (p. B6), makes the uncertainty even more explicit. How’s that for hard-hitting analysis?

So how do we square the circle here? I would argue that there are a few things going on. First, manufacturing, particularly exports, is one of the most visible sectors of the economy; as such, a slowdown there—which has occurred—is more apparent across the board. The service sector, which is less exposed to exports, has done better; it is less visible, though, because it is spread out among smaller firms, which get less coverage. I would therefore argue that the manufacturing focus tilts press coverage somewhat to the negative.

Second, business tends to get more play in the media than labor. Business has done extremely well relative to labor over the past couple of years, but the slowdown in business does not necessarily mean that there’s a similar slowdown for the average person, who wasn’t doing so well in the first place. While business is experiencing a decline from relatively high earnings growth, the average person continues to experience very slow income growth, which at least has been relatively consistent.

Finally, the average person is benefiting from the housing recovery in a way that business is not feeling yet. Although the wealth effect—people feeling richer because of their increased house value and therefore spending more—is not kicking in (and may never do so, in my opinion, given how badly many homeowners were burned), the increased housing values do create a more secure feeling, and that may well be what is being captured in the NYT headline.

Given all of these factors, what we have are statistics and press coverage that reflect a perceived and apparent slowdown by business, but they don’t reflect the experience of the average person. As the polls and press catch on to this, expect to see more discussion of the disconnect.

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