Crippled by the financial crisis, the developed world’s growth trajectory is flattening. Asia and emerging markets, on the other hand, are providing the world with increasing economic leadership and their dependence on the West is declining. That is just as well for growth investors because at the same time as Europe is weakened and divided, Uncle Sam is still reeling from the jab-jab-hook of the debt ceiling spat, S&P’s downgrade and a shocking stock market slide.
That is how the die is cast for the global economy.
Or is it?
Recent signs from across the Atlantic suggest that the US’s ability to surprise the world has not disappeared for ever. Like Rocky Balboa, while you may knock the US economy down, you may not be able to knock it out. Even if an investor understands that the stock market and the economy are two different things, they need to accept the influence the economy has on business and sentiment.
The problem with much of the data used to analyse the economy is that it is backward-looking – it reports things that have already happened. Making investment decisions on the basis of official economic data, therefore, is like driving a car with the windscreen blacked out and a view of the road only through the rear-view mirror. Because of this, investors like to stay one step ahead of the market by looking for ways to predict the future. The Citigroup Economic Surprise Indicator measures how much investors are surprised positively or negatively by a whole suite of economic data. Not only does it reveal how accurate or inaccurate expectations are, it also implies whether sentiment – positive or negative – is correct.
A rising index means the economic reality is better than what investors expect. The reverse is true of a falling reading. Since early June, the US edition of this index has been rising and in recent weeks its pace has accelerated.
The US economy is doing better than people give it credit for; but are people right to remain pessimistic?
You can see what is going on when you look at some of the things that illustrate the disconnection between sentiment and reality. Last week the Bloomberg measure of consumer comfort remained near its all-time low. But at the same time, we learned that chain store sales were up 5.5 per cent in September year-on year, and that car sales also rose 11 per cent on the same basis. It is difficult to imagine the circumstances that lead to apparently contradictory data such as this.
Analysts were mildly surprised when September’s non-farm payroll report, an important monthly measure of US employment, indicated 103,000 jobs were created. This beat rather gloomy expectations and triggered a “risk-on” mood in the markets, but the picture the data paints of the economy is more complex than the headline implies.
The biggest drag on the US employment market is the public sector which has lost 290,000 jobs in the past year, after having grown throughout the recession. In contrast, the private sector has created 1.8 million jobs in the same timescale having shed numbers through the recession.
The positives in the detail of this data is the breadth of hiring, which is reassuring with 68% of industries adding jobs in the past month, and the hiring of temporary workers which has rebounded from a summer lull.
Nevertheless, overall unemployment remained at 9.1 per cent, which cannot be seen as good news however deep you dive into the detail.
Consistent with the fall in consumer confidence in August was a minor collapse in consumer credit growth which has returned to pre-recession levels. So although people are spending at the car lot and at the mall, they are spending within their means. The same is true of mortgage applications which dried up in August.
And returning to the employment markets, the amount of overtime and total number of hours worked in manufacturing fell a little in the past few weeks. Taken with a group of other data, the picture from US production lines is that they are working hard and increasing production to keep up with demand, but still have slack in the system. The non-manufacturing side of the economy is also growing, though not as fast as it was earlier in the year.
There are so many “ifs” and “buts” surrounding the US recovery it would be unwise to go all out either way. But it has a habit of bouncing back and, like Rocky, never knows when to quit.
