by Jeff Miller
With more signs of a slowing economy, the economic debate has sharpened. More voices are now claiming that current economic policies have failed. Others maintain that high gas prices and the Japanese earthquake and tsunami have created a temporary economic stumble.
As we enter the early stages of the Presidential primary season, the economic debate also has a political character. Republicans are vying for position in a contest to determine the best opponent for an incumbent leader with many important issues. It is natural for them to seize upon economic weakness and foreign troubles, just as the Democrats did in 2004 and 2008. It is tempting for investors to agree with the economic argument that fits their own political viewpoint.Instead, we should look at some data. Abnormal Returns had a great screencast with a summary of the top economic stories. This is a quick way to see several different viewpoints — well worth watching.
Among the stories featured is an economic summary from James Hamilton of Econbrowser. He notes that Gross Domestic Income (GDI) is even weaker than GDP.
Some believe that the GDI is more accurate at economic turning points. Prof. Hamilton surveys a number of other indicators including vehicle sales, the ISM data, and other indicators. He concludes, ” So far I’m seeing slower growth, but not a new recession.”
For stronger economic growth to resume, we will need to see some business investment and improvement on the jobs front. We also need more bank lending and greater new business formation.
Background on “Weighing the Week Ahead”
There are many good services that do a complete list of every event for the upcoming week, so that is not my mission. Instead, I try to single out what will be most important in the coming week. If I am correct, my theme for the week is what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.
Readers often disagree with my conclusions. That is fine! Join in and comment. In most of my articles I build a careful case for each point. My purpose here is different. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but some will disagree. That is what makes a market!
Last Week’s Data
The news last week was mostly negative.
There was a little good news.
- Progress on Greek Debt. The European debt questions will take years to resolve. Temporary measures are typical in situations like this. The hope is that improved economies will make a complete solution more feasible.
- The ISM Services index beat expectations by a couple of points. Some emphasize this data series since the US economy has moved more to the service side.
There was a lot of disappointing economic news.
- Initial jobless claims of 422,000 — too high to expect solid job growth. Some attribute the recent levels to unusual seasonal factors and the Japanese supply chain effects. For the moment, I am taking the results at face value.
- The monthly employment data were much worse than expected. Net job growth was much weaker than expected as recently as last week, and even worse than forecasts revised after the ADP private employment forecast. Private sector job net job growth of 83,000 is far less than needed for a reasonable economic recovery. The unemployment rate has moved back above 9%, and there are still many who have not returned to the labor force. Calculated Risk reviews the numbers behind the headlines and includes some helpful charts. Scott Grannis finds a bright spot by looking at longer trends in both the establishment and household surveys.
- The ISM manufacturing index plunged to 53.5. The prior reading was 60.4 and expectations were for 57+. While this still signals expansion in manufacturing and is consistent with GDP growth of 3.8%, some observers emphasize any fall from peak growth.
These were all important results and fit the recent pattern of significant weakness.
The debt ceiling debate continues, with many participants (especially those expecting hotly contested races) taking aggressive adversarial positions. Most veteran observers predict that an agreement will be reached. This might not happen until the eleventh hour. In the interim, those opposing an increase can insist upon concessions and claim victory in the end, even if they vote for the final bill.
Rating agencies are threatening downgrades and foreign observers may not understand this American brand of political brinksmanship. So far the controversy has not really been reflected in the credit markets, but it could get worse before it is resolved.
The Indicator Snapshot
It is important to keep the weekly news in perspective. My weekly indicator snapshot includes important summary indicators:
- The ECRI Weekly Leading Index and the derivative Growth Index
- The St. Louis Fed Stress Index
- The key measures from our “Felix” ETF model.
There will soon be at least one new indicator, and the current choices are under review.
The indicators show continuing modest growth at a slowing pace, with little indication of economic risk. The market fears, as is often the case, are greater than one might expect from the data.
Felix is the basis for our “official” vote in the weekly Ticker Sense Blogger Sentiment Poll, now recorded on Thursday after the market close. We have a long public record for these positions.
[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list. You can also write personally to me with questions or comments, and I’ll do my best to answer.]
The Week Ahead
The coming week is very light on economic data and scheduled news. The Fed beige book will probably not offer any surprises. The Fed believes that QE II will continue to stimulate for months to come, as I noted last week. The market seems to have a different viewpoint, but we should not expect any surprise hints about a possible QE 3 in Fed Chair Bernanke’s scheduled speech next week.
Jobless claims will be closely watched, but will be significant only if breaking well below 400,000.
In trading accounts last week we went completely to cash. We are not yet short. The index inverse ETFs have small positive ratings, but are currently in the penalty box.
For investors, it is a different picture. It is attractive to invest when fears are worse than fundamental conditions, as they are now. Having said this, we continue to exercise caution in establishing new positions.. There is no rush and a lot of uncertainty. We always try to find good entry points. Last week these included some financial names like JP Morgan Chase (JPM). I am also increasing technology holdings like Oracle (ORCL).
Weighing the Week Ahead: Economic Transition from Stimulus by Jeff Miller
Chart of the Week: Whither Stocks? by Erik McCurdy
Secular Cycles for Stocks by Ed Easterling
Overview of the Markets by MacroTides
U.S. Macroeconomic Overview by MacroTides
Jeff Miller has been a partner in New Arc Investments since 1997, managing investment partnerships and individual accounts. He has worked for market makers at the Chicago Board Options Exchange, where found anomalies in the standard option pricing models and developed new forecasting techniques. Jeff is a Public Policy analyst and formerly taught advanced research methods at the University of Wisconsin. He analyzed many issues related to state tax policy and provided quantitative modeling which helped inform state and local officials in Wisconsin for more than a decade. Jeff writes at his blog, A Dash of Insight.