Written by Lance Roberts on Thursday, Dec. 20, 2012.
It never fails that when I am travelling it will be a day that there are major events occurring within the financial markets. Today was one of those days. As I was trapped on an aeroplane watching the economic headlines scroll across the screen of the gentleman watching CNBC in the seat next to me (yes, I am too cheap to pay for it myself) I realised that by the time I got back to the office it would be far too late to do a complete analysis.
Therefore, I am going to hit the highlights of a couple of the major reports with more detail to follow in upcoming posts.
There wasn’t anything of surprise in the release of the final estimate of Q3 GDP. The chart below shows the differences between the 1st and final estimates.
Personal consumption was weaker in the 3rd quarter than originally estimated which has been a concern. In recent months other measures of consumer spending have showed signs of deterioration as well leaving the holiday shopping season in question. That weakness was further highlighted by the large upward revision to private investment which was almost entirely driven by a surge in inventories. This build in inventories is likely unwanted as sales weaken. Exports were stronger than originally estimated as well which is the only positive in the revision data.
The chart above shows the breakdown of GDP by each major category. Personal spending remained stagnant between Q2 and Q3 as the entire surge in GDP from 1.2% in Q2 to 3.1% in Q3 was driven by:
- The sharp, and unwanted, unwanted build in inventories as discussed previously.
- An increase in net exports
- A large positive contribution from Government spending versus the detraction in the previous five quarters.
While GDP was higher sharply higher in Q3 – the boost came from areas that suggest the real economy remains weak. This was further shown by only a modest increase in real final sales.
If the economy was experiencing more substantive growth real final sales would have reflected it. However, with real final sales stagnating at an annual growth rate of just 2% it confirms our suspicions that the real economy remains weak below the headlines. With the incoming data for Q4 appearing substantially weaker our current estimates are for initial readings in January of between 1% and 1.25%. Holiday spending reports will be quite telling about the state of the consumer.
Leading Economic Indicators
The release of the leading economic indicators showed a decline of 0.2 in the index to 95.8 from 96.0 in October. The jump in jobless claims due to Hurricane Sandy is the chief negative for the month. Manufacturing orders have also been weak for the last several months and has been a drag on the index. The positive boosts to the LEI continue to come from building permits and the yield spread.
The one index that we watch closely, as it relates to the economy, is the Coincident to Lagging Indicator ratio which acts much like a book-to-bill ratio. As discussed last month:
“This past week the monthly release of the Leading Economic Indicators showed that the leading-to-lagging indicator ratio dropped to 89.5 which matches the lowest level in more than 2 1/2 years. Historically when the leading-to-lagging ratio has fallen below 91 the economy was either in, or about to be in, a recession.”
This month this ratio dropped to a new 2 1/2 year low of 89.05.
Philadelphia Fed Manufacturing Report
The release of the “Philly Fed” survey came in much stronger than expectations rising from a -10.7 in November to 8.1 in December. Most all of the internals for both current and future activity were higher as the region came back online post-hurricane Sandy as was expected.
The chart above shows the survey as reported and smoothed with a 6-month average. While the report was stronger for the current month the trend of the overall data has been decidedly weaker. We have similar surges in the data before, as seen in the recent report, which fade in the months ahead.
With the other Fed regions, NFIB and the broader macro economic indicators pointing to a weaker environment (as shown in the economic composite index above) it is likely that the recent boost due to the hurricane will fade as well.
There were many underpinnings to the data released today on which I will do a more detailed analysis in the days to come. However, the markets are ignoring both the good, and the bad, of the economic reports and focusing on the “fiscal cliff” debates in Washington.
For investors there are three primary bullish points for being invested in the equities at the current time:
1) QE3 and QE4 are pumping $85 billion in liquidity each month into the capital markets.
2) The ECB, Japan and China will continue to pump liquidity into the global markets.
3) Did I mention QE3 and QE4?
While we are seeing some stabilisation in the economic fundamentals at the current time they remain very weak overall. The analyst community is unabashedly bullish going into next year which does give me some pause. However, with the massive amounts of liquidity being pumped into the system it is advisable to maintain a balanced portfolio approach at the current time until the battle in Washington over the “cliff” is resolved.