Is the economy stronger than the numbers say?

09/14/2010 8:30 am EST


Jim Jubak

Founder and Editor,

There’s good reason to suspect that the early September rally that began on September 1 is going to peter out. From 1049 at the close on August 31, the Standard & Poor’s 500 stock index had climbed 7% by September 13. That’s 7% in just seven trading sessions.

It’s just hard to imagine that stocks are going to break out of their trading range now and stage a significant rally when the macro numbers for the U.S. economy on everything from jobs to consumer debt U.S. economy are just so bad. How can we get a stock market rally when even Federal Reserve most recent comments on the U.S. economy say U.S. growth is decelerating?

But what if the macro numbers, the data that we all hang on, are giving an inaccurate picture of the economy? What if the U.S. economy isn’t growing as fast as China’s or India’s or Brazil’s range of 8% to 10% but what if it’s not growing at 2% headed for 1% either?

I think it’s at least worth considering the possibility that the U.S. economy is stronger than the headline economic numbers are now showing. And that raises the odds that this rally could actually take us above the top of the trading range. That wouldn’t mean investors were facing something like a replay of the March 2009 rally. But it would raise the odds that we’re going to start to see stocks start to work higher with a traditional pattern of higher lows and higher highs.

Am I nuts? (Or is my sanity intact but I’m just plain wrong?)

Let’s face it, the macro evidence that the U.S. economy stinks and is getting smellier is pretty strong.

How bad is it?

  • Unemployment climbed to 9.6% in August from 9.5% in July.

  • Personal income barely inched ahead by 0.2% in July

  • Orders for durable goods without volatile transportation orders fell 3.8% in July

  • Housing starts for single family homes fell in July for a third consecutive month

  • Sales of existing homes plunged 27% in July

  • Capacity utilization at the country’s factories is forecast to barely climb in August to 75% from 74.8% in July

  • Retail sales without cars and gasoline fell 0.1% in July.

Shall I take away the sharp objects yet?

But I’d like to point out a few features of that data that make me if not optimistic then less than pessimistic about the U.S. economy.

First, most of this data isn’t just what we call “trailing.” It’s positively ancient. It can barely crawl because its knees are so arthritic.

Data from July tells you very little about November.

The stock market could be rising simply because it looks six months ahead instead of two months backward.

Second, the recession was  been so deep and lasted so long that some of the traditional causal relationships between this data series and that data series may not apply—or at least it might not apply with the usual chronological relationship.

For example, usually bad loans don’t fall significantly until unemployment does. But in this recovery bad loans are falling, and falling fast, even as unemployment stays stubbornly high. Maybe consumers are so over-extended and so scared of all the debt they’ve piled up so they’re putting extra money to debt. Maybe banks, which did such a bad job in extending these loans, are doing a much better job of managing loans that are in danger of falling behind.

Maybe. Whatever the reason the historical relationship between unemployment and bad debt has added a new twist for this recession and recovery. Makes me wonder what other historical relationships in the economy are different this time.

And third, I’m seeing anecdotal evidence that some companies are investing and hiring as if the economy was getting better rather than worse from their point of view and in within the time frame that they use to make decisions.

For example, on July 9 Cummins (CMI) announced that it would spend $100 million to expand its Seymour plant. Over the next five years that would add 200 jobs to a plant that currently employs 450 workers.

On September 1 Whirlpool (WHR) announced that it planned to build a 1-million-square-foot manufacturing plant for built-in cooking products in Cleveland, Tennessee. Construction will begin in the fourth quarter of 2010.

EI du Pont de Nemours (DD) is investing $295 million in North Carolina and Ohio to double its production of tedlar, a film used in solar panels. The Ohio investment will produce 70 new jobs in 2010 and 2011.

I’m well aware that you can prove almost any trend with anecdotal evidence so I’m certainly not saying this is proof positive that we’re not headed for a double-dip recession.

But I would note that the anecdotes are more recent than the big picture economic data that hails mostly from July. And that many of these anecdotes report planned hiring that won’t show up in the economic data for months.

I’d also note that even if these anecdotes are the tip of some iceberg of economic good news headed our way, they also bear two discouraging messages about the speed with which U.S. unemployment will fall.

First, many of the jobs that are being announced are highly skilled and suggest that long-time unemployed workers without the right skills are going to stay unemployed for a long time yet.  For example, when Japanese tire maker Toyo Tire announced it planned to hire another 200 workers for its White, Georgia, plant, the call was for highly-skilled maintenance technicians and production workers.

Second, the jobs being created are going where the economic opportunities are most profitable. Starwood Hotels & Resorts Worldwide (HOT) plans to add 12,000 jobs this year at the 80 to 100 new hotels its opens globally. The hot markets for hotels are in the developing economies of the world and that’s where the bulk of these jobs will be.

All caveats aside, though, I find the anecdotal evidence heartening. Not so heartening that I’d put money to work in the current market on its strength alone. But the news flow in the last few days certainly suggests that the Standard & Poor's 500 is going to move through the top of its range since late April at 1130. That would be a positive sign for the rest of 2010.

But I don't expect the market to move higher from here without a pull back or two. Consolidations typically take a good deal of back and forth to turn into a new rally. If this market does drop back toward the higher low of August, then, I’d certainly put a little money to work on the strength of this anecdotal evidence. And I’d start with the cyclical stocks that did so well on September 1.

And include a few financials as the good news for the sector included in the new Basel III global banking regulations. (For more on the new rules and what to buy in that sector see my post .)

Full disclosure: I don’t own shares of any company mentioned in this story in my personal portfolio.
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