Is the Economy Better Than it Seems?

09/14/2010 10:02 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Yes, the numbers look ugly, but a lot of them are old. There's more and more evidence that things are getting better at ground level.

There's good reason to suspect that the rally that began September 1 is going to peter out. From 1,049 at the close on August 31, the Standard & Poor's 500 Index had climbed 5.7% by the end of last week.

But after starting with a bang, stocks seem to be struggling as they move closer to the top of the recent trading range, near 1,130 for the S&P 500.

It's hard to imagine that stocks are going to break out of their trading range now and stage a significant rally when the US economy's macro numbers—on everything from jobs to consumer debt—are just so bad. How can we get a stock market rally when even the Federal Reserve's most recent comments on the US economy indicate 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 US economy isn't growing as fast as China's or India's or Brazil's range of 8% to 10%, but also isn't growing as slowly as 2% or headed for 1%?

I think it's at least worth considering the possibility that the US economy is stronger than the headline economic numbers now suggest. 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 rally that started in March 2009. 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, assuming my sanity is intact, am I just plain wrong?

First, the Bad News

Let's face it, the macro evidence that the US 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 inched ahead by only 0.2% in July
  • Orders for durable goods, not counting 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 expected to have barely climbed in August, to 75% from 74.8% in July. (The August number is due out September 15.)
  • Retail sales, excluding 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 US economy.

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The Old News

First, most of these numbers aren't just what we call trailing. They are positively ancient. They can barely crawl, because their knees are so arthritic.

Data from July, the latest available for some of these reports, tell you little about the future.

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

Second, the recession was 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, might not apply with the usual chronological relationship.

For example, bad loans usually don't fall significantly until unemployment does. But in this recovery, bad loans are falling, and fast, even as unemployment remains stubbornly high. Maybe consumers are so overextended and so scared of all the debt they've piled up that they're putting extra money toward repaying 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 twist to this recession-and-recovery cycle. It 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 were getting better rather than worse, from their point of view and within the time frame that they use to make decisions.

Who's Hiring?

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

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

DuPont (NYSE: DD) is investing $295 million in North Carolina and Ohio to double its production of Tedlar, a film used in solar panels. The investment will produce at least 70 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 that we'll avoid a double-dip recession.

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

More Bad News

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 US unemployment will fall:

  • Many of the jobs that are being announced are for highly skilled workers, suggesting that longtime unemployed workers without the right skills are going to stay unemployed for a long time yet. For example, when Japanese tire maker Toyo Tire (OTC: TOTRF) announced it planned to hire an additional 200 workers for its White, Georgia plant, the call was for highly skilled maintenance technicians and production workers.
  • The jobs being created are going where the economic opportunities are most profitable. Starwood Hotels & Resorts Worldwide (NYSE: HOT) plans to add 12,000 jobs this year at its 80 to 100 new hotels around the world. The hot markets for hotels are in developing countries, 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 that strength alone. But the news flow of the past few days suggests the S&P 500 Index is going to move above 1,130, the top of its range since late April. That would be a positive sign for the rest of 2010.

I don't expect the market to move higher from here without a pullback or two, however. 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 that anecdotal evidence. And I'd start with the cyclical stocks that did so well September 1. (See "Eight Stocks for the Market's Next Rally.") And include a few financials, because there was good news for the sector in the new Basel III global banking regulations. (For more on the new rules and what to buy in that sector, see my blog post "Look for another wave of bank acquisitions.")

At the time of publication, Jim Jubak did not own shares of any company mentioned in this column in his personal portfolio.

See the complete Jubak Picks Portfolio here

Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.

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