It is worth noting the recent improvement in economic news:
• The October employment report showed a gain of 151,000 nonfarm payroll jobs, the most since April ex-Census. Expectations are for a similar gain in November, although probably not enough jobs added to push down the unemployment rate.
• The BEA estimated real GDP grew at a 2.5% annual rate in Q3. This is still sluggish, but an improvement from the 1.7% growth rate in Q2.
• The Personal Income and Outlays report for October indicated incomes grew at a 0.5% rate (month-to-month), and it appears PCE has grown at about a 3% annualized rate over the last three months. The personal saving rate was 5.7% in October, and although I expect the rate to increase a little more – it appears a majority of the adjustment is behind us (a rising saving rate is a drag on personal consumption).
• The 4-week average of initial weekly unemployment claims has declined to 436,000 last week from over 480,000 at the end of August. The weekly reading was 407,000 last week; the lowest since July 2008.
• Most regional manufacturing surveys, with the exception of the NY Fed survey (empire state), has shown a pickup in manufacturing. This suggests the manufacturing sector is still improving (the ISM manufacturing index for November will be released on Wednesday).
• The Architecture Billings Index (a leading indicator for commercial real estate) is near flat – suggesting investment in commercial structures such as hotels, offices and malls will stop contracting next year. (addition by subtraction!)
• Even small business optimism has improved slightly.
Most of the reasons for the recent slowdown are still with us – less stimulus spending, the end of the inventory adjustment, problems in Europe and a slowdown in China, and cutbacks at the state and local level – but it appears Residential investment (RI) has bottomed and will most likely add to GDP growth in 2011. I believe the RI drag is now behind us, and RI is usually the best leading indicator for the economy.
The data is still mixed and fits with my general view of a sluggish and choppy recovery (my view since the spring of 2009). Although I don’t see a sharp increase in growth, I think the pace of recovery will probably pick up a little bit in 2011, and I’ll take the over on the consensus view of 2.5% GDP growth in 2011. My guess is 3%+ GDP growth in 2011 – still not a strong recovery given the amount of slack in the economy, but an improvement over 2010.
Unfortunately there probably will not be enough growth to significantly reduce the unemployment rate in 2011.
Note: I’ll add more before the end of the year, but I’ve been sharing my thoughts with a few analysts and economic commentators and I try to post my views whenever they change – even a little. Right now it looks like the “slowdown, but no double dip call” was correct (it is still early), and now I’m becoming a little more optimistic and taking the “over” on 2011 GDP growth (still no v-shape recovery though).
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