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A Long, Strange Season For Macro Analysis

 December 04, 2012 09:21 AM


Analyzing the business cycle in real time is a task that's always threatening to lead us astray, but in the current climate the hazard may go into overdrive. All the usual gremlins are with us, but there are additional complicating factors to consider these days, including: the uncertainty and high-stakes poker of the fiscal cliff negotiations in Washington; a recession in Europe that coincides with a (dormant?) fiscal crisis on the Continent; and deciding how, or if, Hurricane Sandy's lingering effects are distorting the incoming data.

Consider yesterday's auto sales news for November, which rose sharply to the highest annual rate in nearly five years. Is that a sign that the U.S. economy is chugging along? Or is the demand surge a one-time response to the hurricane, which unexpectedly cut short the working lives of thousands of autos in one fell swoop.

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"Vehicle sales are one of the encouraging spots of our economy," notes Gary Bradshaw of Hodges Capital Management. But will the party last? That depends on how much of the demand surge is storm related. "November was a very good month, but December has the potential to be even better," predicts Jesse Toprak, chief analyst for TrueCar.com.

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Consider, too, the conflicting news on manufacturing for November. As I noted yesterday, the ISM Manufacturing Index delivered a warning to optimists with a below-50 reading, a signal that economic activity in the sector is contracting, albeit only slightly. But a rival benchmark from Markit Economics tells us that growth in the manufacturing sector strengthened last month.

Separating the legitimate signals from the anomalous ones is always a challenge, and it's not going to get any easier in the months ahead. I expect that we're going to see an unusually wide range of numbers as the economic updates roll in through the end of the year and into January. Prepare yourself for equally dramatic forecasts that purport to know what it all means with absolute certainty.

Don't misunderstand: There's plenty to worry about. But the numbers aren't uniformly awful, at least not yet. Meantime, there's another large uncertainty that may bring relief. Imagine that the fiscal follies in Washington ends and a reasonable deal is engineered. Would that unleash a wave of positive sentiment across America? Would it translate into a new round of positive economic momentum? Or is that merely wishful thinking? Again, hard to say until—if?—we see the details of any deal.

Expectations for the U.S. economy seem to be quite low—again. But we are in a strange period with little precedent. There's still only one solution: study a broad data set to make informed decisions. That's a terrible way to evaluate the economy… except when compared to the alternatives.
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