Orlando's Outlook: No double dip on horizon

As of 02-01-2013

Bottom line In a week chock full of important, market-moving economic data, there were plenty of metrics to please both the bulls and the bears. On the negative side of the ledger, fourth-quarter Gross Domestic Product (GDP) shockingly plunged back into negative territory for the first time since mid-2009, the Conference Board’s consumer confidence index plummeted to its weakest reading since November 2011 at 58.6, the personal savings rate surged to its highest level at 6.5% since May 2009, and this morning’s labor report for January was tepid, at best. But the bulls countered with powerful upward revisions for nonfarm payrolls for November and December, surprising rebounds in both Michigan sentiment and ISM manufacturing in January, and a stronger-than-expected fourth-quarter for corporate revenues and profits, to date. Amidst these crosscurrents, stocks have rallied to a five-year high, as investors have concluded that Hurricane Sandy and the ongoing fiscal policy discussions in Washington will likely have only a transitory negative impact, and that economic growth and corporate results will strengthen later this year.

GDP turns negative
In its flash report for 2012’s fourth quarter, the Commerce Department said the economy contracted 0.1%, its first venture back into negative territory since the second quarter of 2009, when the U.S. economy was just about to finally extricate itself from the Great Recession. That sizable miss compares with consensus estimates for positive growth of 1.1% for the fourth quarter, and it represents a massive sequential decline from the third quarter’s relatively healthy 3.1% GDP reading. But the details aren’t that gruesome, as most of the miss was related to corporate inventory destocking and the federal government’s gutting of the defense budget. That brings the full year in at 2.2% GDP growth for 2012, vs. 1.8% in 2011.

Inventories plunge The pace of inventory restocking fell to $20 billion in the fourth quarter, down from $60.3 billion in the third quarter, which cut 1.3 percentage points from quarterly GDP growth. This was due to the impact from Sandy and business concern to keep inventories very lean heading into an uncertain Christmas season, given the potential economic chilling effect from fiscal-cliff discussions in Washington.
Government spending plummets Total government spending dropped at a 6.6% annual pace in the fourth quarter, vs. a 3.7% third-quarter increase, which subtracted 1.3 percentage points from fourth-quarter GDP. The decline was largely driven by a 22.2% decline in military spending—likely related to President Obama’s upcoming automatic spending sequester—which was the biggest quarterly defense cut since the Vietnam War in 1972.
Net trade slower The sluggish economy here and weaker end-market demand overseas contributed to a reduction of 0.25 percentage points from fourth-quarter growth due to a wider trade gap. Exports declined by 5.7% in the fourth quarter, vs. a gain of 1.9% in the third quarter, while imports fell by 3.2% in the fourth quarter, compared with a modest 0.6% third-quarter decline.
Consumer spending improves Personal consumption expenditures (PCE), which account for 70% of GDP, rose by 2.2% in the fourth quarter—adding 1.5 percentage points to GDP, compared with only 1.6% growth in the third quarter. This was largely due to durable-goods sales, which leapt by 13.9% in the third quarter, the most in two years. Auto sales surged to a 15.3-million annual rate in December and to 15.5 million units in November, marking the industry’s best back-to-back showing since 2008.
Housing accelerates Marking its seventh consecutive quarterly gain, residential investment leapt by 15.3% in the fourth quarter—which added 0.36 percentage points to GDP—compared with a 13.5% third-quarter increase. Homebuilding rose by 11.9% for all of 2012, its best performance since 1992.
Capex turns positive Real business fixed investment surprisingly rose by 8.4% in the fourth quarter, compared with a 1.8% third-quarter decline, which added 0.8 percentage points to GDP. Business equipment and software spending jumped by 12.4% in the fourth quarter as companies shook off their Washington-related concerns, compared with a 2.6% third-quarter decline, which is the weakest reading in three years. Business structure investment, such as factories and office buildings, slipped by 1.1% in the fourth quarter, compared with no change in the third quarter.

Tepid January jobs report
Despite Sandy and the potential chilling effect from the ongoing fiscal-cliff discussions in Washington, January generated a mixed set of employment data. Although nonfarm and private payrolls were slightly weaker than expected, there were strong upward revisions in the two prior months. Manufacturing and household employment were disappointing, but construction was strong. Retail bounced, but hours worked were flat, wage growth eased, government hiring fell again, temporary-help turned negative and the unemployment rate ticked up.

Benchmark revisions The Bureau of Labor Statistics (BLS) unveiled its annual benchmark update today, which grew payrolls by 424,000 workers from April 2011 to March 2012. They also incorporated the new Census Bureau data into the household survey, which increased the size of the labor force by 136,000 workers.
Nonfarm payrolls revised up January rose by 157,000 jobs, which was slightly weaker than consensus estimates for a gain of 165,000 jobs, but the BLS revised November and December results sharply higher by 127,000 jobs. November’s preliminary gain of 146,000 jobs, which was revised up to a stronger gain of 161,000 last month, was revised up to a final gain of 247,000 jobs. December’s preliminary gain of 155,000 nonfarm jobs was revised up to a gain of 196,000 jobs.
Private payrolls enjoy revisions too January rose by 166,000, which was essentially in line with the consensus forecast for a gain of 168,000 jobs, although the BLS collectively revised November and December up by 119,000 jobs. November’s preliminary increase of 147,000 jobs, which was revised up to a stronger gain of 171,000, was revised up to a stronger final gain of 256,000 jobs. December’s preliminary increase of 168,000 jobs was revised up to a gain of 202,000.
Household survey muted January’s reading of 17,000 household jobs was disappointing, as it slipped from December’s already uninspiring level of 28,000 jobs. The household survey is an important leading employment indicator for both nonfarm and private payroll growth.
Mixed picture in construction and manufacturing Due to the continued strength in housing and the repairs from Sandy, construction added a strong 28,000 jobs in January, compared with 30,000 in December, which was the most since September 2011, and 24,000 in November. Manufacturing hiring remains soft, with only 4,000 new jobs in January after a tepid, downwardly revised 8,000 in December.
Retail rebounds, but temps slip Despite fiscal-cliff fears, retailers surprisingly added 33,000 jobs in January, compared with upwardly revised gains of 11,000 jobs in December and 70,000 jobs in November. Temporary help—another important leading indicator of employment growth—reversed to lose 8,000 jobs in January after adding an upwardly revised 9,000 jobs in December and 27,000 in November.
More negative government revisions The difference between private and nonfarm payroll gains in January was the loss of 9,000 federal, state and local government jobs, which marked the fourth consecutive month of government job losses, compared with losses of 6,000 jobs in December and 9,000 jobs in November.
Wage growth slips, hours worked flat Average hourly earnings in January rose by a 0.2%, but that’s down sequentially from gains of 0.3% and 0.4%, respectively, in December and November. Year-over-year wage gains stayed flat at an increase of 2.1% in January versus December, while the average private workweek for all employees has remained unchanged at 34.4 hours in each of the past three months. A change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 300,000 jobs to or from the economy.
Unemployment, participation, and labor-impairment rates stable The unemployment rate (U3) ticked up to 7.9% in January due to the Census Bureau revisions, while the labor impairment rate (U6)—also known as the “total” rate of unemployment, because it more broadly includes discouraged workers and the underemployed—was unchanged at 14.4% for the last three months. The labor force participation rate also held steady at 63.6% in January for the third consecutive month, which remains a tick above the 31-year cycle low of 63.5% achieved in August 2012.
ADP stronger than expected This is important proxy for private payroll growth posted a gain of 192,000 jobs in January, vs. consensus estimates of 165,000 jobs, while December was revised down from a preliminary gain of 215,000 to a final gain of 185,000 jobs. ADP reported that in January, small firms added 115,000 jobs, 79,000 jobs came from mid-sized companies, and larger companies lost 2,000 workers.
Initial weekly jobless claims fall to five-year low Another important leading employment and economic indicator, weekly claims fell to 330,000 for the week ended Jan. 19, before rebounding to 368,000 claims last week. But there may have been some seasonal-adjustment issues involved here, rather than a significant strengthening of the labor market.