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VERSACE: Pessimism in most economic indicators

- - Thursday, August 30, 2012

ANALYSIS/OPINION:

Normally, in the second half of August, the stock market is rather quiet as traders, bankers and investors take their summer vacation. Others are busy getting ready as children prepare to head back to school. All of this generally means stock-market volume dips considerably in late August. This year, however, the stock market has been extremely quiet, and as one friend who works on the floor of the New York Stock Exchange told me, "You could hear a pin drop."

While same-store August sales figures shared by a number of retailers such as the Gap, Nordstrom Inc., the Limited (which owns Victoria's Secret and Bed, Bath & Beyond) and others were better than expected and the housing market appears to be healing, the overall stock market continues to sit on pins and needles.

Why?

While the stock market has ground its way higher in recent weeks fueled by hopium-filled expectations that the Federal Reserve will further stimulate the economy via round three of quantitative easing, the economic data of late has not been good, but it has not been so bad that the Fed must act as it has in the recent past.

That said, there is concern to be had about the continued health of the "recovery" near term.

Domestic manufacturing data in the form of regional Federal Reserve Bank surveys continued to point toward a deceleration in manufacturing. Weak order flow calls into question the ongoing viability of the rebound in the manufacturing sector. Moreover, the employment situation remains weak overall and worsened in some districts month over month.

Even the Conference Board's Consumer Confidence Survey, which in August reached its lowest level since November 2011, raised red flags on what is to come near term as consumers' optimism about the short-term outlook deteriorated. The percentage of consumers expecting business conditions to improve over the next six months declined to 16.5 percent from 19.0 percent, while those anticipating business conditions worsening increased to 17.7 percent from 15.1 percent.

What's driving the gloom? In my view, it's the slowing domestic economy and increasing tension associated not only with the presidential election but also with the pending fiscal cliff that must be dealt with. What many may not realize is that because the economy has been far weaker this year than many expected at the outset, including the Congressional Budget Office (CBO), the risks associated with the pending fiscal cliff are far greater than just six months ago.

Even after the upwardly revised reading on the second quarter of 2012 gross domestic product, the economy grew just 1.85 percent in the first half of 2012, well below the 2.7 percent rate in the second half of 2011. Accounting for this, the CBO's revised position is that the $560 billion mix of spending cuts and tax hikes that make up the year-end fiscal cliff will "probably" cause a recession in 2013, as the economy would shrink by 0.5 percent for the year. The CBO also raised the flag on uncertainty as the impact of the fiscal cliff is being felt already in the form of hiring and business investment.

I'd add that many also likely are restraining hiring and spending as they wait to see what the outcome will be of this year's presidential election. But rather than leave that to speculation, let's turn to the data found in the August Wall Street Journal/Vistage Small Business CEO Survey. Per that survey, roughly half of nearly 800 owners of small businesses in the U.S. expect economic growth to remain sluggish in the year ahead. Furthermore, amid a backdrop of economic and political uncertainties, many do not plan to boost hiring or increase investment spending anytime soon.

My personal view remains that the Fed will enact some stimulus following its next policy meeting on Sept. 13, but I do not see it being of the magnitude of prior efforts. Despite the stimulus we may get, I suspect the domestic economy will remain in neutral or in a slow idle until we know the victor of the presidential election and how the fiscal cliff will be handled.

Buckle up my friends, it's going to get bumpy.

Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com or follow him on twitter @chrisjversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.