Headlines about the economy in July sounded dire. “IMF Says Doubt Weighs On Economy,” reported The Wall Street Journal. “Economy Looks Weaker As Retail Sales Slump,” said The Boston Globe. “Fiscal Cliff Could Trigger U.S. Recession: IMF Economist,” according to a CNBC story.
While the U.S. economy indeed was not growing briskly this summer, it was growing, and gloomy headlines belied reasons for optimism. Here are counterpoints to bad news and recession-mongering, reasons to expect that a slow-growth recovery will continue.
Positive Earnings Outlook. Earnings drive stock prices. A key prop supporting stock prices is that big-company profits are holding up and earnings estimates have stayed strong. In July 2012, the consensus earnings estimate of Wall Street analysts for companies in the Standard & Poor’s 500 Index stood at $105 per share for 2012 and $118 per share for 2013. In the short term, headlines can whip stock prices around, but corporate earnings are the basis for stock prices in the long run. If analysts are close to correct in their earnings estimates, it would support stock valuations. Plus, we are halfway through 2012, so achieving something close to the $105 target should not be a stretch.
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New-Jobs Formation. It’s erratic. But it is positive. Job formation was choppy in the months following the last recession. The jobs recovery that began in January 2002 went negative in early 2003 even as the economy surged. Don’t expect new jobs to grow steadily, and remember that inconsistent does not mean a recession is around the corner.
Household Versus Establishment Jobs Survey. Release of monthly jobs survey data in May and June caused big one-day dips in stock prices. But that’s partly because the media focus on the U.S. Labor Department’s Establishment Survey data on job creation at large corporations and not the Household Survey, which includes jobs created by small business and agriculture. While the widely-followed Establishment Survey tallied 80,000 net new jobs in June, the Labor Department’s less-referenced Household Survey, indicated 128,000 net new jobs were created. Over the past six months, according to independent economist Fritz Meyer, the household survey has registered 1.6 million net new jobs versus just 900,000 by the Establishment survey — a significant difference. Yet big media seem generally unaware.
ADP Jobs Survey. ADP, which processes data for small businesses nationally, does its own survey of job creation. While over time, it tracks closely with the government survey data, in recent months it has shown a material difference. ADP reported more than twice the number of new jobs created in May and June than did the Labor Department’s Establishment survey.
Auto Sales. Three years into the recovery, a return to the historical mean of about 16 million sales of American vehicles annually is upon us. The average age of cars in the U.S. increased during the last recession, as people were foregoing new car purchases, but the average age now is decreasing, which bodes well for car sales. Ford’s chief economist was quoted in The Wall Street Journal on July 3 as saying consumers are still eager to trade in aging vehicles for new, more fuel-efficient models equipped with the latest technology. In addition, she said, low interest rates and easier access to credit also are boosting auto sales.
Leading Economic Indicators (LEI). In its release of the June LEI, The Conference Board said the economy was growing modestly and pointed to a “relatively low risk of a downturn (http://www.conference-board.org/data/bcicountry.cfm?cid=1) in the second half of 2012.” In addition, the six-month rate of change in LEI was not signaling a recession, as it has before previous downturns. According to economist Meyer, the six-month rate of change in the LEI dipped substantially below zero in advance of each of the last three recessions. The most recent numbers, however, show nothing of the sort.
Consumer Debt. Contrary to frequent press reports about consumers being tapped out and struggling under a mountain of debt, the Federal Reserve on June 22 said consumers’ ability to meet monthly expenses has not been better since 1980. The Fed’s financial obligation ratio, which measures consumers’ fixed expenses compared to disposable income — a good measure of consumer debt on mortgages, credit cards, car loans, etc. — has recovered fully. At 16%, 84% of after-tax household income is available for other purchases.
Predicting the economy’s next upturn or downturn is not easy and these optimistic signs could be quickly dashed if Europe slides into recession, if a war breaks out in the Mideast, or any of a myriad of bad scenarios becomes reality. Absent such a negative surprise, economic data support a continued slow recovery. But the bias of the media, toward selling newspapers and getting viewers of websites and TV shows, tends to elevate the importance of bad news. Good news doesn’t sell, create urgency, or feed fear. Prudent long-term investors must try to keep that in mind.