Despite the recently revised third-quarter GDP growth (revised down to 2 percent annualized growth from 2.5 percent), the U.S. economy is beginning to show signs of improvement. I see a widening gap between this positive U.S. economic performance and the continuing woes that are crippling European economies. At some point in the near future, I believe we will begin to focus more and more on the positives here at home and less and less on those negatives coming out of Europe, and this will allow U.S. financial markets to begin to outperform.
We have seen retail sales improving, corporate profits overall looking solid, and even some minor improvement in employment (to 9 percent unemployment from 9.2 percent). In fact, initial jobless claims, although they ticked up slightly by 2,000 last week, are coming off of a seven-month low from the previous week of 388,000. The Philly Fed manufacturing index, which translates to 53 on an ISM (Institute for Supply Management) basis, showed a very strong employment component. Also, the index of industrial production beat estimates with an especially strong reading on business equipment. This translates to strong capital-goods investment, which is also a job creation engine.
Retail sales in October also beat estimates, and rose more than 7 percent versus October 2010. Both producer and consumer price inflation dropped slightly in October. Well-respected economists like John Ryding and Conrad DeQuadros are predicting 3 percent real GDP growth for the fourth quarter, and Joe LaVorgna even thinks GDP could be 4 percent in the fourth quarter.
Our problem is that we are completely focused on the problems in Europe, which are overshadowing the improvements we are seeing at home. Stock markets here in the United States are being whipsawed day-to-day, week-by-week, as news from Europe roils global markets. But the reality is that we are (finally) starting to see real progress here, and that will translate to better financial market performance at some point. It’s that “at some point” that is the 800-pound gorilla in the room.
I believe the key change in perceptions for American investors (and by extension U.S. markets) will come when we see fourth quarter consumer spending results for the holiday shopping season. As we move into January and begin to get the final results from retailers, I believe we are going to see that, for the first time since the Lehman Brothers failure in late 2008, consumers are gaining real confidence in the future of our economy and are spending money again. I still feel they will be looking for bargains, but when they find them, they will pull the trigger. In fact, the most recent release for the University of Michigan’s Consumer Sentiment Index showed the highest reading in five months of 64.1 (November). Consumer spending accounts for 70 percent of total GDP, so it is absolutely critical to economic growth that consumers ge out there and spend.
Black Friday got its name because, historically, the Friday after Thanksgiving was the day of the year, each year, that retailers went from the red to the black — from losing money to making a profit. While that is typically not technically the case anymore, retailers are certainly keen to ramp-up sales massively for the holiday season, starting with Black Friday. We now also have Cyber Monday, the day online retailers offer exceptional sales. There is now an interesting and developing dichotomy between traditional brick-and-mortar retailing and online retailing, but that’s a topic for a future article.
If the divergence between U.S. (positive) economic improvement and negative news from Europe continues, I believe American investors and consumers will eventually begin to focus on what is happening here with our economy and will therefore start to look ahead even beyond 2012, which I believe will be a transitional year for the U.S. economy, to 2013 and beyond, with optimism. I further believe that this optimism about the future will translate to positive stock market performance, improving employment and a much stronger economy — notwithstanding the rapidly growing national debt, which is now above $15.3 trillion and rising very quickly ($122,000+ per taxpayer, and $49,000+ for even man woman and child (citizen) of the United States).
Keep in mind that stocks trade based on future expectations, and not on current factors, so as we get into 2012, market participants will be looking ahead, at least several quarters, and into 2013. If Congress can come up with some kind of viable strategy to reduce the budget deficit and the government stops printing currency to buy our own debt (we are now the largest holders of our own debt, even larger than China, and currently own $1.6 trillion worth of our own treasuries), I feel that we can turn the corner economically.
Consumer spending and employment are the keys. If we can improve consumer confidence enough so that people get out and spend consistently, companies will have the confidence and the cash to hire people. Lower unemployment will feed increasing consumer confidence and spending and this positive confidence loop will result in much higher economic activity and thereby increased tax revenues for the government. This is the only way, in my opinion, we will have the resources to deal with the massive national debt and annual budget deficits that got us here in the first place.