Succinct Economic Status & Market Radar Update: November ’10

The “Succinct Economic Status” report, along with my additional research, is used to update the “Market Radar” (on the right of the blog).  Both these reports are designed to provide a coincident picture of the economy.

Note that I usually post this report during the first week of the month (after the jobs report).  This particular report is a bit late and doesn’t take into account continued improvement in various indicators or increasing risks/headwinds in December.  Things have gotten a bit crazy with the real job and other issues demanding more time commitment.  These should be temporary and I look forward towards providing new reports and thoughts on today’s interesting investment climate.

Succinct Economic Status: November ’10

  • Consumer Confidence: Consumer Confidence continues in the doldrums, however we have seen some improvement in November.  Nothing to write home about though.
  • Job Market: Corporate downsizing seems to be completed as firings (initial jobless claims) decline markedly in November.  The job market continues to improve, however most leading indicators show no significant sign of a resurgence in hiring.  The job market continues to heal slowly.
  • Inflation and Credit: Overall inflation remains quite low.  However, commodities and raw materials have seen increased pricing pressures.  However, this has failed to translate to consumers has there is still no sign of pricing power.
  • Housing:  Housing continues to struggle and portrays an L-shaped recovery thus far after the tax credit expired.  Prices also continue their double dip.
  • Consumption: Reports of improving consumption trends filled the airwaves in November.  Black Friday sales were better than expected.  Slowly we are seeing firming demand at the consumer level. This increase has been brought on by the affluent class.
  • Manufacturing and Service Industries: Dollar continues to help as on the whole manufacturing bounced back in November, however, leading indicators still point to uncertainty ahead.
  • Around the Globe:
    • Eurozone:  Signs of slowing are beginning to permeate as the Euro had rallied a significant amount, while the sovereign debt crisis is again coming to the fore.  Ireland is bailed out, but spreads in Portugal and Spain continue to rise translating to contagion effects rising.  Overall financial conditions are getting worse.  Germany continues to shine.
    • Asia: Fears regarding China inflation are at the forefront.  Thus far they have only shown the desire to combat this via rising interest rates, not significant Yuan appreciation.  Signs continue to point towards growth/overheating in China as PMI indices come in better than expected, however leading indicators point to uncertainty ahead.  G-20 didn’t result in anything substantive and leaves the “Currency War” issue up in air.  While they did pledge to look into the increasing global balance problems in the next year, the market reacted adversely to the announcement and points to this being a more pressing problem than officials admit.

Changes to the Market Radar for November ’10

Below are my updates to the “Market Radar”, a concise and simplified exhibit (on the right of the blog) that shows what current headwinds and tailwinds are affecting the economy.

  • Headwinds
    • November saw a resurgence of the sovereign debt woes that plagued the euro zone in April and May. Interestingly, Germany has appeared to come out unscathed from an economic standpoint as continued upside surprises in confidence surveys and retail sales signal that Germany is participating in the recent strength of the global economy.  This strength has persisted even during a period which saw the euro rise from June to November.  Unfortunately, outside of Germany the rest of the euro zone is grappling with the side effects resulting from the implementation of their austerity packages: economic weakness, social unrest, and deflation.   The fact that they are in a currency union makes the situation worse as there are limited monetary policy options available to combat this weakness, such as devaluing one’s currency to increase exports.  It is now clear that the market hasn’t bought the recent promises of politicians and sovereign yield spreads have been climbing as a result  Austerity as a viable solution for these peripheral nations is quickly fading as they fall into debt traps.  For these reasons, it is one of the top headwinds facing the US economy as issues in Europe would undoubtedly translate to weakness in exports (manufacturing and jobs) as they of the US’s largest trade partners.
    • Don’t look now, but housing prices are double dipping. Because of this I’m upgrading the housing market to the second (from fifth) top headwind facing the US recovery at this time.  Continued deterioration in the housing market may begin to suppress consumer spending and confidence.  Furthermore, there is still a large housing inventory being reported on the market (not even including shadow inventory!).  This is certainly a disturbing trend to focus on in the months ahead.
    • I’m amending the headwind titled “Currency Wars” to “Currency Wars/Geopolitical Risks” given the recent turmoil on the Korean Peninsula and reports of China playing dirty with Japan as they withhold rare earth metals. This headwind has moved down a couple spots as currency issues seem to have abated for the time being.
  • Tailwinds
    • Consumer strength in April has merited an upgrade for this factor on the “Tailwinds” list from fourth to second. Consumers have to come to terms with the economic environment and are not as cautious as they were in late 2008/early 2009. Continued improvements in this sector (which accounts for 70% of the US economy) will ultimately lead to job growth and the virtuous cycle of more employment breeding more consumption and vice versa will be in full swing.
    • Recent weakness in core durable goods orders signals that business investment as a tailwind for the US economy is weakening. I am moving this tailwind down two spots to fourth.
  • Events
    • I’m dropping “Mid-term Elections” and “Bush Tax Cuts” from the events list as these have come and gone.
    • Around April politicians will be faced with a difficult decision, one that is now on the “Events” list.

That does it.  December’s “Succinct Economic Status” and “Market Radar” reports should come out on time.  Thanks for reading and happy holidays!

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