Tuesday, November 6, 2012

Storm Surge vs. Fiscal Cliff

Will the storm surge offset the fiscal cliff? Let’s think outside the box for a minute, very far outside the box. Let’s assume that there is no deal on either postponing or fixing the fiscal cliff problem. Everyone knows that this will cause a recession at the beginning of next year. Government spending will be cut, and taxes will go up. That’s certainly going to push the economy over the edge.

Are we sure about that? Maybe this is the only way we can actually make progress in reducing the deficit. Perhaps the initial recessionary impact of going over the cliff will be offset by lots of spending early next year attributable to the recovery from Hurricane Sandy. In this scenario, real GDP might continue to grow early next year with the “Second Recovery,” giving the economy a boost all of next year. Granted, this may be too farfetched for the wailing chorus of fatalistic doomsayers. For now, the US economy is continuing to grow at a slow, but steady pace:

(1) Payroll employment. The growth in payroll employment on a year-over-year basis has been exceptionally steady, hovering around 1.5% for about a year. On the other hand, private-sector wages are up just 1.6% y/y, with the wages of nonsupervisory production workers up just 1.1%, the lowest on record. Then again, productivity rose 1.5% y/y during Q3, with unit labor costs up just 1.1%. That’s good for profits, and profitable companies tend to expand by hiring more workers.

(2) Purchasing managers indexes (PMIs). October’s M-PMI edged up from 51.5 during September to 51.7. The NM-PMI edged down to a still respectable 54.2 during October from 55.1 the month before. These moves were led by an encouraging jump in the M-PMI’s new orders index from 52.3 to 54.2 in October, while the NM-PMI’s new orders index declined from 57.7 to a still solid 54.8.

(3) Employment PMIs. Friday’s employment report was certainly full of good news, as I discussed yesterday. So was yesterday’s NM-PMI employment index, which rose from 51.1 in September to 54.9 in October. On the other hand, the M-PMI employment index fell from 54.7 to 52.1. The average of the M-PMI and NM-PMI employment indexes edged up from 52.9 in September to 53.5 in October.

Today's Morning Briefing: May the Best Man Win. (1) Who will be more bullish or bearish for stocks? (2) Romney will let Bernanke retire. (3) Fiscal cliff: Deal or no deal? (4) Is it really such a big deal? (5) Storm surge could offset fiscal cliff. (6) US economy growing despite dire warnings. (7) Lots of geopolitical challenges for global economy. (8) Not much growth around the world. (9) German orders: Das is nicht gut. (More for subscribers.)

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