The Independent Market Observer

1/4/13 – Underlying Economy Continues to Improve

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jan 4, 2013 8:25:56 AM

and tagged Fiscal Cliff, Market Updates

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I have spent a couple of days talking about the situation in Washington, and now it’s time to take another look at the country as a whole. Despite the fun and games in D.C., the real economy continues to improve in multiple ways. Let’s take a look at some.

First, employment. Today’s data shows that, overall, 155,000 jobs were added in December, just matching population growth. This is a reasonable number that should keep the unemployment rate stable, and that is what happened. Unemployment stayed steady at 7.8 percent, and the underemployment rate (which I prefer) remained stable at 14.4 percent. Not great news, but given the fiscal cliff uncertainty, not terrible either.

The details were better, as private payrolls increased by 168,000, suggesting that the difference was in government jobs; the private market is expanding, which is what we want, even though government employment is shrinking. In addition, manufacturing jobs were up 25,000. Finally, average weekly hours ticked up a bit, indicating that existing workers are working harder. Hourly earnings also rose slightly, now up 2.1 percent year-on-year from 1.9 percent. More jobs and more hours, with higher wages per hour, mean more disposable income and more consumer spending.

Second, business sentiment improved as well. Although it was expected to decline, nonmanufacturing sentiment improved significantly, to a 10-month high. In fact, it actually topped the high end of expectations—a positive surprise.

Auto sales were also very positive. The Wall Street Journal, New York Times, and Financial Times all covered this, with headlines noting a 13-percent rise to a five-year high. As I have said before, auto sales are second only to housing as an indicator of consumer belief in the future.

Overall, the fiscal cliff coverage doesn’t seem to have derailed the recovery. The existing deal should act, at least to some extent, to preserve and extend the gains we have made. Even though there will be a drag on income, from the expiration of the payroll tax waiver and other factors, continued growth in employment, hours, and wages should help offset that. There are some discouraging signs, principally in lower-than-expected holiday sales, but even these signs are mixed, and sales may have improved after a slow start.

We can therefore expect current growth to continue at about the same rate for the next couple of months, based on current data. Given the ongoing uncertainty surrounding the next cliff, in two months, I doubt we will improve significantly beyond current levels, but at the moment, at least, it seems the recovery will continue.

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