Robert Johnson, CFA) Investors
continued to focus on the Greek crisis this week, basically ignoring a
flood of economic and earnings news that was on balance quite positive. I
remain convinced that Greece, by itself, will not bring down the world
economic system. However, all the dithering and protests may be
emblematic of what could happen in other countries facing budget crises.
The Slow March Forward Continues
While I was out over the past six weeks I was surprised that not much
had changed either relative to the Greek situation or the general
economy, despite incredible volatility in the stock market. Overall GDP
numbers for the third quarter were a lot better than most had expected
back in mid-September. A lot of the commentary seemed to use words
like, "a strong rebound off of weak data earlier." No way. The real U.S
GDP growth rate was neither as weak as the 0.4% and the 1.3% of the
first two quarters of the year indicated, nor as strong as the 2.5% in
the third quarter (and the odds favor another upward revision) and a
potentially strong fourth quarter will suggest. Auto-supply-chain- and
weather-related issues and sky-high gas prices all artificially reduced
first-half numbers and are inflating second-half statistics. The real
underlying inflation-adjusted growth rate in the economy appears to be
an anemic but steady 1.75%-2.25%.
Employment, Manufacturing, and Auto Data Indicate Slow but Steady Growth
Outside of Europe, the biggest news was a healthy dose of employment
data that was generally moving in the right direction. Year-over-year
employment growth remained at a slow but steady 1.7% rate, initial
unemployment claims approached their recovery lows, the Challenger, Gray
layoff report showed a healthy drop in layoffs, and even the Monster
online employment index managed its best improvement of the year.
However, government-related employment continued to act as a drag on
the economy. Manufacturing data this week were mixed, with reported new
orders in the U.S. looking particularly good. Meanwhile, Purchasing
Manager Index data both in the U.S. and the rest of the world remain
stuck in neutral (though there was some meaningful deterioration in
Auto industry news was decidedly better, as October sales jumped to a
seasonally adjusted annual rate of 13.2 million units, with Japanese
cars beginning to appear on dealer lots and the incentives flowing once
U.S. Payrolls Grow by 80,000 in October
Overall, I was pleased with the Bureau of Labor Statistics employment
report, even though net employment growth of 80,000 people fell at the
low end of the estimate range of 70,000-110,000 (on a base of 131
million nonfarm payroll employment). The more representative
year-over-year data show job growth in the private sector of about 1.7%.
While satisfactory, the growth remains too low to make much of a dent
in the unemployment rate, which fell to 9.0% from 9.1% this month.
Large Revisions to Prior Months' Data Are Even Better
As I noted in this week's video,
the seasonal factor was a relatively large negative subtraction from
the actual number of jobs that were added, which was the reason for my
relatively weak outlook. Substantial revisions to the two previous
reports were the real highlights.
Net job growth for August was revised to 104,000 from 57,000, and
September was revised to 158,000 from 103,000. These huge revisions are a
not-so-subtle reminder of the dangers of reading too much into any one
I still think the best way to analyze the employment data is to look
at the year-over-year percentage change using a three-month average.
This has the benefit of trimming out changing seasonal patterns and the
effects of one odd month (for example, weather-related issues or
strikes, such as the Verizon (VZ)
work stoppage this summer).