The Independent Market Observer

11/29/12 – Baby Steps Forward on the Recovery

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Nov 29, 2012 10:53:54 AM

and tagged Fiscal Cliff, Europe

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Slowly, slowly we move forward. Economic growth for the third quarter was revised upward to 2.7 percent, well above the initial estimate of 2.0 percent, but slightly below the expected revision of 2.8 percent. This is a good result, but it probably will weaken in the next quarter, as quite a bit of it was due to inventory buildup, which will be drawn down.

The newly released Federal Reserve Beige Book survey shows that most regions are improving economically, with the exception of the Northeast due to Hurricane Sandy. The New York Times (NYT) has a good story on page B9, “Fed Survey Shows Economy Improving in Most Regions,” that offers highlights for each region; the Wall Street Journal (WSJ) has a similar piece on page A4, “Economy Growing Modestly, Fed Finds.” Nine of twelve regions, excluding the Northeast, showed improved growth, and more than half showed improved hiring. The recovery continues.

Growth is attributed to the housing recovery and strong consumer spending. To quote the NYT story, “Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue”; this is according to stats from the National Association of Home Builders. Home sales were up 17 percent year-on-year in October. Consumer spending has remained strong, as I discussed in the Black Friday piece, and it appears as if this strength will continue. One area of consumer spending that has improved is auto sales, per “Auto Sales Hit Passing Lane” (WSJ, p. B1). The article makes the point that pent-up demand has driven sales to another four-year high and how that demand is expected to grow.

Given that both housing and consumer spending are expected to continue strongly, what’s the problem? The answer, of course, is the fiscal cliff, which is deterring business hiring and investment, as discussed on the front page of the Financial Times (FT) in “Fiscal cliff fears sweep US businesses,” which highlights once again the gap in perception between consumers—who don’t get it—and business, which does. I note, though, that despite these worries, employment improved in more than half of the Fed regions, as noted above.

Even with the fiscal cliff, there are steps forward, with a front-page story in the WSJ, “Obama Is Flexible on Highest Tax Rates” showing that the White House gets the need for flexibility, but with two articles in the FT—“Democrats dig in over reform” and “Party’s left presses Obama to choose the right path,” both on page A4—which show that the internal war among Democrats continues. We can also see preparation for failure on both sides, with a story in today’s NYT, “Obama Begins Public Campaign on Tax Standoff” (p. A17). The Fed also understands the risks of failure and is reportedly planning more stimulus in 2013, per the front page of the WSJ.

All of this is par for the course at this stage of negotiations, and the political theatre should not conceal the progress that has been made—which is substantial, at least in the form of implicit concession on both sides. The aggressive involvement of business in pushing the importance of a resolution is also constructive. Finally, the strength of the recovery even in the face of the cliff is a positive sign as well.

Europe is showing slow improvement as well. The recent completion of the last fudge on Greece, the approval of the Spanish bank rescue, and the emergence of plans for greater fiscal union are all steps slowly forward. In many ways, the U.S. progress is parallel to that of Europe, although we are not nearly in as deep a hole and have moved much more effectively to get out of it.

Overall, an encouraging day. Unfortunately, there is no quick and easy way out of the hole we are in, but there is a slow and painful one—and that is the road we are on. Onward and upward.

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