- - Thursday, February 2, 2012


The stock market had a strong start to 2012, with the Dow Jones industrial average and the S&P 500 advancing 3.4 percent and 4.4 percent, respectively, in January, followed by a healthy start to February. Supporting the climb in both indexes is the modest but continued improvement in domestic economic data and what appears to be a workable solution to the Greek debt crisis.

Just this past week, we learned domestic manufacturing continued to improve in January, auto sales for the month grew year over year, December construction spending was stronger than expected and, according to ADP, 170,000 private-sector jobs were added in January. The bittersweet news in the ADP number was that January job creation slowed compared to the 292,000 jobs that were added in December and the 209,000 added in November.

In addition to the favorable domestic data, China’s Purchasing Managers’ Index (PMI) expanded slightly in January and suggests the downturn in China manufacturing may be bottoming out following several months of data that showed it contracting. Factory output also grew for the second straight month in India, as measured by the HSBC India Manufacturing PMI. That index rose to 57.5 in January, up from 54.2 in December.

Offsetting that favorable data, however, we learned that consumers continue to save more than they are spending, consumer confidence remains shaky and corporate earnings continue to be a mixed bag. While companies such as Qualcomm Inc. and others have beaten expectations, others, including Amazon.com, Navistar International, Abercrombie & Fitch and Chipotle Mexican Grill, have delivered less than Wall Street was anticipating.

Meanwhile AMR, the parent of bankrupt American Airlines, wants to slash 13,000 jobs and terminate employee pension plans as part of a cost-cutting strategy to compete with rivals. Those figures were not included in the Challenger Job Cut report for January, which shows a 28 percent month-over-month rise in job cuts, with the vast majority coming from the private sector. While many will quickly point out waning seasonal needs at retailers, that category represented less than 25 percent of overall January job cuts.

In aggregating the data, it appears the global economy continues on a path of growing slowly rather than crashing, as many have speculated might happen. Putting that in context, however, shows that our gross domestic product (GDP) for the first half of 2012, while up meaningfully compared with the first half of 2011, will grow far more slowly than in the second half of 2011.

Recent forecast cuts by the World Bank and the International Monetary Fund support that view, and so now too does the Congressional Budget Office (CBO), which updated it economic forecast this week. The CBO forecasts that the domestic economy will continue to recover slowly, with real GDP growing by 2 percent this year and 1.1 percent next year. In CBO’s forecast, the unemployment rate remains above 8 percent both this year and next, a consequence of continued weakness in demand for goods and services. CBO expects economic activity to quicken after 2013 but to remain below the economy’s potential until 2018. As economic growth picks up after 2013, the unemployment rate will decline gradually to about 7 percent by the end of 2015 before dropping to near 5.5 percent by the end of 2017.

The good news is, most think the U.S. economy will continue to move forward, but as the CBO points out, the pace of growth is not fast enough to deal meaningfully with unemployment and has the government tracking to deliver a $1.1 trillion federal budget deficit for fiscal 2012.

Here’s hoping the CBO and others are wrong, but Friday’s January employment rate will give us a better sense of how right they might be.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at [email protected] Follow him on Twitter @ChrisJVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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