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VERSACE: Mixed signals belie Fed’s new optimism
Question of the Day
This past week has been an extremely turbulent one for the stock market — up and down but essentially flat as this is being written. Not only did more than 1,300 companies report their March quarter-end financial results, but we also had another week of (at best) mixed economic data and learned that Britain has fallen into its first double-dip recession since the 1970s.
As has been the case over the past few quarters, corporate earnings continue to be a mixed bag characterized by some companies doing well — Apple Inc., Equinix Inc., Citrix Systems Inc., GNC Holdings Inc., among others — and some — Exxon Mobil Corp., United Parcel Service Inc., and Netflix Inc. — failing to meet Wall Street expectations or offering a tepid outlook. Lest I forget, the trend of weekly unemployment claims trending back toward the three-month high continued this week.
Yet despite the above, which on balance should raise an eyebrow or two about the U.S. economy's prospects in the coming months, the Federal Reserve not only updated but upped its growth forecast this week. The Fed now expects the economy will grow 2.4 percent to 2.9 percent in 2012, modestly higher than the January forecast that projected growth of 2.2 percent to 2.7 percent.
What I found surprising about the Fed's upward revision was that it conflicts with the rash of economic data we have received in recent weeks. Those indicators point to a reversal from the growth exhibited in January and February.
In the past few weeks, we have learned of softer manufacturing data from a number of the regional Federal Reserve banks, which was echoed in the steep drop in March durable goods orders reported this week. Similarly, data on housing starts, new home sales and existing home sales in March point to a far weaker housing market than thought just a few weeks ago. A confirming sign on the housing market can be found in the Mortgage Bankers Association's Weekly Mortgage Index as refinancing activity has been responsible for more than 70 percent of mortgage applications in the past several weeks.
In my view, the recent spate of domestic economic data, combined with the impact of slower growth in China and continued weakness in the eurozone, is more likely to result in economists trimming their 2012 GDP expectations. Confirming signs of the slowdown can be found in the management commentary that is part and parcel of companies' quarterly earnings reports.
While truck manufacturer Paccar Inc. beat expectations for its March quarter, weak demand in Europe and eroding orders domestically for the companys heavy-duty trucks are resulting in production cuts and a 10 percent workforce reduction at a company facility in Ohio. Weak demand in Europe was confirmed by Dow Chemical Co., which said that parts of Europe remain in "recessionary conditions."
As I mentioned above, the trend in weekly jobless claims has been on the rise over the past several weeks, and that is worrisome following the far weaker than expected March employment numbers. Here, too, however, the Fed revised its unemployment forecast this week to between 7.8 percent and 8 percent by year's end. Given that the downward trend in the unemployment rate has been fueled more by the decline in the labor-force participation than actual job growth, in my view it would behoove the Fed to explain its relative optimism. As with its gross domestic product revision, this more-optimistic unemployment forecast seems to fly in the face of what the recent data suggests.
This is not the first or second time the Fed has been at odds with what people are seeing in every day life. After all, the central bank still sees inflation below 2 percent this year. Tell that to a family that has to put food on the table and fill up their car each and every week, and wait for their reaction.
• Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com, or follow him on Twitter @ChrisVersace. At the time of publication, Mr. Versace had no positions in companies mentioned.
About the Author
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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