Economy Holding Its Own

Today’s much-hyped jobs report does little to help either candidate’s 11th hour election message. From the recovering perspective, job growth accelerated in October as the number of new hires increased by a seasonally-adjusted 171,000 people. But from the sluggish perspective, the unemployment rate rose from 7.8% to 7.9% in October. More people re-entered the job market than new jobs were available to offset. Today’s stock market is down, ceding some of yesterday’s 1.1% gain on worsening damage from Hurricane Sandy, some poor earnings reports, and an election too-close-to-call; in short, uncertainty remains.

So is the economy improving or not? Today, we’ll take a look at some of the recent data to gain an understanding of the direction of the economy and its strength. If the presidential and congressional elections can be decided next Tuesday or next week (there is considerable speculation that some electorally-vital states like Ohio may not be able to determine a winner right away) we will have some better idea about taxes and perhaps the nation’s regulatory climate, but uncertainty on these important issues will not simply disappear with the election.

The government’s consumer confidence report released this week indicated that consumers, who represent nearly 71% of the economy, are feeling quite a bit better than they did this time last year. According to Econoday, “consumers were considerably more positive in their assessment of current conditions, with job market improvements as the major driver. They were modestly more upbeat about their financial situation and the short term economic outlook.”

But as consumers look to the future, results become somewhat more mixed. According to Econoday, “those anticipating an improvement in business conditions over the next six months increased but so did those expecting business conditions to worsen. Consumers’ outlook for the labor market was also mixed. Those anticipating more jobs in the months ahead increased as did those expecting fewer jobs.”

Bloomberg’s consumer confidence report was less sanguine. Their index stands at minus 34.7 on a scale of minus 100 to plus 100. According to Bloomberg, the index is based on Americans’ ratings of the national economy, the buying climate and their personal finances. A full 82% say the economy is in bad shape, 17 points more than the long-term average. Sixty-nine percent call it a bad time to spend money compared to a lifetime average of 64%. And 52% rate their own finances negatively, 8 points more than average.

Confidence was improved by the fact that consumers saw their income increase by 0.4% in September and 0.1% in August. The wages and salary component of the report gained 0.3%. The rise in income and confidence spurred retail sales to improve significantly in September as sales rose 0.8%, following a 0.5% increase in August. Unfortunately, real income was flat for September after adjustment for inflation, but consumers spent anyway.

Yet another factor improving the moods of consumers is the values of their homes has stopped declining and may be improving now. The Case-Shiller seasonally adjusted home price index for the 20-city composite advanced 0.5% in August, following a 0.3% gain the prior month. On a year-ago basis, the 20-city index is up 2.0%, following 1.2% rise in August.

While the consumer took a multi-year hiatus from pulling his share of the economic weight, the manufacturing sector took up a healthy portion of the slack. But during the summer months, in the face of Europe’s financial crisis and worsening recession, and uncertainty at home, manufacturing began to slow. Recent data, however seem to indicate the declines may be slowing and even reversing.

The October Markit PMI index slipped to a final reading of 51.0 from 51.1 in October. Anything over 50 implies growth, but a reading of 51.1 is anemic. Output increased at its second-slowest rate in the past three years and new orders lost momentum. New export business (which was the sweet spot of manufacturing) continued to lose ground for a fifth month. Increasing input prices (read producer inflation) were also noted in the report.

The government’s ISM report of manufacturing was a little more upbeat than the PMI report showing that forward momentum may be picking up as their new orders index rose to 54.2 from 52.3 in September. Production also improved, moving into positive territory at 52.4 from 49.5 in September. Weakness was in employment, down to 52.1 from 54.7. Orders continue to be held back by exports which fell further into negative territory to 48.0 from 48.5 in September.

On the positive side, factory orders, excluding aircraft which distorted the numbers, rose 0.2% in September and 0.3% in August. However, they have a long way to go at that rate to climb back from July’s 5.6% decline. The report also showed that business investment continues to languish amidst the uncertainty that exists in today’s political and global economic climate. Inventories are rising, which is good if retailers experience higher demand this Christmas.

Corporate earnings have exceeded projections at 72% of companies that have reported so far this third quarter, while sales have trailed estimates at 59% of firms. Companies are profitable largely because they have gotten their debt under control and have improved productivity with relative fewer employees and less capital improvement. These results have a limited lifespan.

And Barron’s big money poll shows that span might be short indeed. The number of big money-manager pros who are bullish on the stocks and the economy have shrunk to 46% of respondents, down from  55% in the spring poll and 52% a year ago. According to them corporate earnings growth is slowing, there’s the threat of war in the Middle East and defaults in Europe, and the fiscal cliff all threaten to corral the bull.

Given the sum of the indicators during the past couple of weeks it appears the economy is holding its modest pace of growth. GDP reported a couple of weeks ago of 2% is still growth, but it is not sufficiently strong to generate enough new jobs to dent real unemployment (which includes those workers who have given up looking).

As the major questions facing consumers, entrepreneurs, small businesses, and large corporations alike are answered, it is likely that this economy is ready to explode and lead the world out of global recession as it has done so many times before. We have our druthers as to how those answers would come, but the decision rests with the 207,643,594 of us registered consumers of government. Our collective opinions will be announced next Tuesday. Then or soon thereafter the uncertainty will begin to clear.

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