Wednesday, November 16, 2011

Puzzling Economic News

This passage appeared yesterday evening in a daily email from a financial services provider which attempts to explain the drivers of US equity and fixed income market performance,

"Retail sales in the US were stronger than anticipated and prices at the wholesale level cooled markedly from the levels seen the month prior, while the first read on manufacturing activity for November coming from the New York region unexpectedly moved back to a level depicting expansion and business inventories were flat."

Yet we know that the real median consumer income has declined in the last decade, and unemployment remains high- in the 9% neighborhood on the narrowest definition, probably 16% on the widest one.

If there wasn't a large and high-profile environmental variable, i.e., the European sovereign debt/banking crisis, currently causing uncertainty, these slightly positive economic data reports might be seen as harbingers of economic recovery.

However, as I wrote yesterday, in retrospect, the signs of mounting trouble in 2007 didn't prevent hope and cheerleading by the financial community through much of 2008.

I believe it was Larry Fink, in his CNBC appearance yesterday, who proclaimed that when an economic and financial market recovery occurred, it would be a surprise which moved faster than investors might expect. Isn't that always how it is?

The overall macroeconomic picture today seems very cloudy. Even Fink agreed that while current economic signals appear weakly positive, the environment is gloomy. By that he apparently meant the political climate of excessive, intrusive governmental policy, weak employment picture, and low GDP growth.

It's been written that during the Great Depression, things were tight but bearable if you had a job. Those who were employed at larger companies tended to weather the period pretty much intact. But new job growth was absent, so the unemployed remained so for a long time.

Our current economic situation is beginning to resemble that scenario. There were brief periods of equity market rises and seeming economic expansion during the 1930s, but none of them lasted for long.

With that example in mind, I wonder whether profits from US companies, by themselves, are sufficient to trickle through to shareowners and drive a US economic recovery in the face of stagnant employment. It wouldn't seem that's a likely recipe for a robust US economic expansion.

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