Keeping an Eye Out: Late March 2011

If you check out my bi-annual outlook, there are sections named “Keeping an Eye Out”, which are signals that my thesis is coming to fruition or I’m full of hot air.  Below I cover some sectors of my outlook.

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–> Manufacturing has continued its strong run in recent months with surveys at lofty levels and industrial production numbers showing growth.  What I’m focused on is end-demand in the US, China, and Europe.  Consumption metrics for the US show that demand remains in growth mode, albeit weak.  Meanwhile, China has shown small signs of slowing growth with PMIs coming above 50 (signaling growth) but trending slightly lower.  Finally, Europe is probably the weakest link in terms of end-demand as that region undergoes its austerity treatment.  While these signs don’t signal a slowing in US manufacturing in the immediate-term, they do pose questions for the near to medium-term.  Overall, I believe that manufacturing will continue to expand over the next couple of months, so expect more good news on this front.  This is mostly in-line with my overall thesis in the near-term, though I do expect a slowing climate from these lofty levels as the year progresses, which may end up in contraction once again if we undergo a double-dip recession, a high probability in my view.

–> The Service Industry can be semi-grouped with the manufacturing sector.  It still is signaling growth and end-demand continues, albeit weak.  The Dollar has fallen recently, and bodes well for continued exports.  Note that the global economy’s growth rate may have peaked already as emerging markets are busy raising rates to control inflation, while the Eurozone continues its austerity program.  However, for the time being the Service Sector remains in a growth phase and this may be the case at least for the next couple of months.    Overall in-line with my thesis in that the sector is in a self-sustaining recovery (if held in a vacuum)…however I continue to believe that the probability of a exogenous shock is increasing, such as rising gas prices or worsening business conditions.

–> Housing remains in the doldrums as per recent reports.  Of particular attention to me was the housing starts and permit numbers.  Both were dismal in today’s “show me now” mentality.  However, longer-term this is exactly what we need.  Supply needs to get worked down before we can have any sort of housing recovery.

–> Consumption: In this category, one of the factors which I noted contributing to my long-term thesis was clearly noted (see point 4 under “Consumption”).  The job market seem to be improving but it remains choppy, therefore consumption growth will remain fragile.  Wages aren’t keeping up with inflation so that’s a negative (real wages declined over the past few months).  On the bright side, in the near-term higher gas prices and bad news abroad hasn’t slowed down consumption growth thus far.

–> Mixed news continues to describe the uneven nature of the jobs recovery.  The “Employment Trends Index” released by the Conference Board shows that the job market will improve at an accelerated rate in the months to come, while the latest JOLT survey shows that the jobs market continues to struggle.

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