The Economy: A Look Back and What’s Ahead (3.10.14)

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Last Week

Economic data last week broadly met or exceeded expectations, and 1) Solidified that the global economic recovery is ongoing, 2)Strongly implied the economic weakness in the U.S. in Dec/Jan is temporary, and 3)Ensured the Fed will continue to taper the QE program by another $10 billion at the March meeting a week from Wednesday.

From a practical investment standpoint, the last week’s data reinforces that the global economic backdrop remains a general tailwind on equities, although there certainly are risks to monitor.

Starting with the jobs number, we all know by now that it was a surprisingly strong report, at 175K jobs added in Feb. vs (E) of 150K and “whisper numbers” of around 130K-ish.  And, in addition to the positive February data, there were positive revisions of 37K jobs added in December and January (11K and 26K, respectively).

Looking a bit deeper into the number, while the headline was a strong beat, the details of the jobs number weren’t quite as good.  Specifically, critics are pointing to the fact that the average workweek fell from 34.3 to 34.2 hours, missing estimates and falling for the second-straight month.  That’s somewhat important because the average workweek is a leading indicator for employment. (As employers get busier, they work their current employees more before hiring additional staff, so an uptick in average workweek usually precedes increased hiring.)

I’ll let the economists debate the minutiae and validity of the report, but the bottom line from a market standpoint is this:  The jobs report was a positive because the weakness in hiring in December and January stopped and the “weather excuse” appears more valid, and, combined with other data, it shows the slowdown in the U.S. economy so far this year isn’t gaining momentum and appears, for now, to be temporary.

The other big reports out last week were the ISM manufacturing and non-manufacturing (services) PMIs.  And, the results were, on balance, positive.

ISM manufacturing rebounded from that big drop in January, bouncing to 53.2 vs (E) 51.9.  ISM non-manufacturing, though, dropped to 51.9 vs. (E) 53.5, and the employment sub-index fell to 47.5, the first sub-50 reading for that number in over two years, although that sub-index was obviously overshadowed by the government report.

Internationally, data was also supportive.  China remains the No. 1 “macroeconomic” risk to the global recovery, but last week the data largely met expectations and, while the Chinese economy is slowing, so far it appears to be slowing about as everyone expected (which is “OK” as that won’t de-rail the global recovery).

Indeed, much to the despair of the China bears, China remains a crisis that hasn’t materialized.  Manufacturing and composite PMIs met expectations and importantly stayed above the 50 level.  And, although there was a disappointing trade balance report out Friday night (exports plunged), a lot of that was because exports were “pulled forward” by the Chinese New Year, so that soft data point will get a “pass” of sorts.

Europe was actually the area with the best data last week, as manufacturing and composite PMIs beat, as did EU retail sales.  This in part led the ECB to make no changes to policy, and to strongly imply that the ECB was “on hold” for the foreseeable future (which is very positive for European bonds, and I continue to think PIIGS’ bonds remain some of the most-attractive options in the bond markets today.)

Bottom line is that, while you can argue that the economic data last week had its gives and takes (there are legitimate points for the bears to remain bearish), it did help positively resolve the question of “is the global and domestic recovery faltering?”) with a pretty definitive “no.”

Bottom line from last week is this:  Economic data remains broadly supportive of stock prices, and if this rally is going to break in the near future, it won’t be because of economic growth concerns.

This Week

After an exhausting week of data last week, we all get a rest this week.  The calendar is very light domestically, with retail sales and jobless claims (both Thursday) the only reports to watch.

Internationally it’s almost equally quiet, although we do get some Chinese data Thursday morning (industrial production and retail sales).  Given the ongoing concern about China, the data will be watched, but even if it “misses” I don’t think it’ll materially change people’s outlook on China. (The expectation remains for between 7.0% and 7.5% GDP growth.)