07 Dec 2007 “The report of my death is an exaggeration”
Mark Twain’s famous response to a reporter who had been sent to determine whether he remained alive appropriately describes a US economy that simply refuses to succumb. Above the din of pessimistic whining one can almost hear the bull snorting and grunting in defiance.
Today’s monthly jobs report gave bullish investors just what they were hoping for; a report that was just right. It appears that US employers are hiring enough workers to keep the economy out of recession, but not so many to keep the Fed from reducing interest rates at their meeting next week. The Labor Department reported that payrolls rose by 94,000 workers after a 170,000 increase in October. The unemployment rate remained at 4.7% for the third month in a row.
It is hoped that job growth will sufficiently boost the consumer against the headwinds caused by falling home values and rising energy costs. The report provides evidence that the economy is not slowing as fast as it appeared in the last few weeks. The Fed can respond more deliberately to a gradually slowing economy rather than be forced to play catch-up with a plummeting one.
With home values falling and access to mortgages and home equity lines getting tougher, consumers are now using more credit cards. The Wall Street Journal reports that Morgan Stanley cut its rating on Capital One (the largest credit card issuer) to “underweight” from “overweight,” citing a growing concern that the US consumer finance industry will face a more severe cycle than markets have yet discounted. Merrill Lynch cut their ratings on American Express, Capital One, and Discover Financial Services to “sell” from “neutral” in anticipation of a consumer recession.
Consumer confidence in theUK, Europe, andJapanis sliding too. European GDP growth in the third quarter fell to 2.7% from a year earlier compared with 3.3% in the last three months of 2006. Industrial production dropped in September and strengthening European currencies are slowing their exports. Retail sales in Germany,Europe’s biggest economy, declined 3.3% in October from September.
Central banks there are starting to react by lowering rates.Britain lowered rates on Wednesday, preceded by Canada two days earlier. But they are behind the US Federal Reserve which has cut twice and will likely cut again next week. These cuts feed hope that European Central Bankers will do what is necessary to keep their economies strong. They got some help on Wednesday whenGermanyreported that factory orders increased the most in four months in October alleviating fears that the slow down would be too abrupt.
As this morning wears on equity markets are showing some signs of life as all sectors except energy and telecommunications are up. While the jobs data is just one piece of a complicated puzzle, it does help assuage some fears. We expect the Fed will cut rates a quarter percent at their December 11th meeting. We think the economy is very close to technical recession, but can still avoid it if some important pieces fall into place. These ‘pieces’ include the price of oil falling $10 to $15 per barrel, greater certainty in the scope and size of sub-prime asset damage to banks’ balance sheets, greater liquidity in credit markets, broader rate reductions in Europe, and no major geopolitical events. If some or all of these trends begin moving positively, perhaps an obituary is too early.