The Economy: A Look Back and What’s Ahead

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Last Week

In almost an exact repeat of the first week of August’s data, almost every economic report last week pointed to an economy gaining steam, except the monthly jobs report.

The Institute for Supply Management’s manufacturing and non-manufacturing PMIs surged higher, with the non-manufacturing rising to the highest levels since ‘05.  Additionally, the details of both PMIs were as strong as the headline numbers. New orders (the leading indicator in both reports) rose sharply, and most sub-components pointed to increased activity. The PMIs last week strongly imply the domestic economy is continuing to grow, and that the pace of this growth may be accelerating.

Auto sales were also strong last week, both in aggregate (total motor vehicle sales) and on a company-specific level.  As I said in the Report last week, despite the tech industry hogging most of the headlines, the U.S. is an autos- and housing-driven economy, and it’s pretty difficult for the economy to be slowing when sales of both are rising (as they are now).

But, once again a disappointing jobs report left a bad taste, economically speaking, in everyone’s mouth.

To spend a few seconds on the newest jobs data—it certainly was an underwhelming report, but as always, the monthly jobs report should be taken with a grain of salt.

First, even on its best day, this report is subject to massive revisions.  Second, it’s also subject to crazy one-offs.  For instance, the big downward revision to the July jobs report came almost entirely because of more temporary layoffs from car manufacturers than expected due to  scheduled maintenance on plants.  Those job “losses” were job “gains” in August.  Second, and I’m not making this up, a work stoppage in the porn industry centered around an AIDS case could have skewed the data. (You can read the Washington Post story here.)

The internals of the report were actually “OK.”  Average workweeks moved up 0.1 hour and hourly earnings moved up 0.05 (both are leading indicators of employment growth). The U-6 unemployment rate—which is the one we should all watch because it includes underemployed workers and is a better measure of the labor market than typical unemployment—declined to 13.7% from 14.0 in July.

Bottom line is the data from last week, when taken in aggregate, showed the domestic economy is definitely continuing the trend of slow growth, and potentially seeing some marginal growth acceleration. And, jobs report aside, the data further cemented the market’s expectation for a $10 billion-ish QE tapering announcement at the September Fed meeting.

This Week

Things should slow considerably from an economics standpoint this week.  Retail sales on Friday is the highlight, as there are concerns the U.S. consumer is slowing down, given less-than-stellar June and July retail sales reports, and a slew of retail stocks missing earnings or issuing lower guidance (WMT, TGT, AEO and ANF, to name a few).

While the rebound in the manufacturing sector is good to see, the consumer still carries the U.S. economy. If data shows the consumer is materially pulling back (the data hasn’t shown that yet, but that’s the concern), then that will dampen the outlook for equities going forward.

Jobless claims Thursday is the second-most-important number, and after the disappointing August jobs report, markets will want to see claims continue to fall and make new lows for the recovery.  If claims can continue to fall, that will help ease some of the anxiety the monthly jobs report caused.

Really everyone’s focus should be on the Chinese economic data this week, as we have already gotten the August trade balance (which was positive), the Consumer Price Index and the Producer Price Index.

Chinese industrial production and retail sales come very early tomorrow morning, and obviously if the data can confirm the manufacturing PMIs and continue to show a continued stabilization in the Chinese economy, that will help commodities and basic materials stocks continue their outperformance vs. domestic equities. (Expect European equities to peripherally benefit as well.)

China growing at minimum 7.5% this year is essential to the “return of global growth” investment thesis. If these numbers are good, we could see that trend accelerate.

Bottom line is, outside of China, this is a slow week. Expect further digestion of last week’s numbers and lots of conversation about when and how the Fed will taper QE, as well as whether Larry Summers will be Bernanke’s replacement.  But, don’t expect any of the data this week to change the market’s expectations of a September taper. Unless the retail sales data are just awful (and I doubt even that would be enough to change Fed expectations, but people will speculate), a “small” taper looks like it’s on the very near horizon.