Second Terms

The first four years of Obama were very bullish for the stock market. The S&P 500 rose 66% from January 2009 through October 2012, using monthly averages of daily closing data. That compares very favorably to the 50% average of the first terms of the past 11 presidents starting with FDR. The S&P 500 rose 16% during the second terms of the past six presidents who were reelected.

Yesterday’s 2.4% drop in the S&P 500 instantly discredited the widely held view that the initial response to an Obama victory would be bullish because the Fed would remain free to pursue QE3 for at least another four years. Fed Chairman Ben Bernanke is now likely to be reappointed in early 2014 for another four-year term if he wants to keep his job. If not, he’ll be replaced by a like-minded successor. Today’s WSJ lists the usual suspects who would make good Bernanke clones, including Janet Yellen, Don Kohn, Roger Ferguson, Alan Blinder, and Larry Summers. So why the Bronx cheer from investors?

Today's Morning Briefing: Nothing to Fear, But… (1) The meaning of life: A full tank of gas. (2) Bully for Obama. (3) Bernanke’s clones. (4) Is Washington running on empty? (5) The Thelma-and-Louise scenario. (6) ObamaCare’s unintended consequence. (7) Why do Republicans coddle rich Democrats? (8) Apocalypse now, postponed, or never? (9) Europe’s slippery slope. (10) Fretting about revenues. (More for subscribers.)

Global Economy

President Barack Obama faces lots of issues around the world that pose significant risks to the US economy. The fiscal cliff may actually be the easiest one to deal with if a deal can be struck between the Democrats and Republicans.

Making deals to peacefully resolve the conflicts between Israel and Iran, China and Japan, and the already warring factions in Syria could be much more challenging. If any of these conflicts worsens, the global economic expansion potentially could be disrupted. For now, the global economy is growing, though at a slow pace on balance, despite the recession in Europe. Let’s review:

(1) US and China. The latest batch of US economic indicators for October confirms that the US economy continues to grow at a leisurely pace despite fears that growth could stall. We reviewed Friday’s better-than-expected employment data on Monday. Yesterday, we reviewed the PMIs, which are all above 50.

Moving above 50 for the first time since July was China’s M-PMI during October, but just barely to 50.2. China’s NM-PMI was stronger last month, rising to 55.5 from 53.7 the previous month. Elsewhere in the Asia-Pacific region, Indonesia’s real GDP growth held above 6% for an eighth quarter as domestic consumption and rising investment countered an export slump.

(2) Europe. On the other hand, German factory orders fell by 3.3% during September. Foreign orders tumbled by 4.5%, led by a plunge of 9.6% in orders from the euro zone. Domestic bookings dropped by 1.8%. The area's recession is starting to spread into the strongest economy in the euro zone. That’s confirmed by the latest M-PMIs, with the one for Germany falling 1.4 points to 46.0 (a two-month low). France’s index (43.7) remained around September’s 41-month low of 42.7, and Italy’s M-PMI dropped to a 40-month low of 45.5.

Today's Morning Briefing: Another Storm. (1) Still powerless. (2) Hello again from MiFi. (3) Noah has left the neighborhood. (4) Storm surge vs. fiscal cliff. (5) Still in power in DC. (6) This too shall pass. (7) Despite disappointments, earnings estimates are holding up. (8) They are falling for Materials, IT, and Industrials. (9) Earnings outlook improving for Financials and Telecom. (10) “Stay Home” rather than “Go Global” for another year? (More for subscribers.)

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.)

US Employment

Friday’s employment report augurs well for my “Second Recovery” economic outlook for 2013. Of course, I am assuming that the fiscal cliff will be averted. Let’s slice and dice the latest numbers. During October, payroll employment rose 171,000. The previous two months were revised up by 84,000, resulting in a three-month average gain of 170,300.

I give more weight to the revised data for the prior two months than to the latest month's preliminary estimate. That’s because upward (downward) revisions tend to confirm that the labor market is improving (worsening). So the latest data are encouraging, as is the positive 12-month trend in the revisions.

 

There’s plenty more good news in the BLS report. The household measure of employment comparable to the payroll measure rose 733,000 during October, following a gain of 294,000 during September. Over the past two months, the overall household measure, which is more volatile than the payroll one, rose a whopping 1.28 million.

Today's Morning Briefing: Consumers Are Looking Up. (1) Employment gains support “Second Recovery” scenario. (2) Upward revisions are meaningful. (3) ADP back on track. (4) Earned income at record high. (5) Consumer Optimism Index at new cyclical high. (6) Monster is comforting. (7) Consumer Discretionary should continue to outperform. (8) Despite poor earnings season, S&P 500 forward earnings remains at record high. (More for subscribers.)

Where Did All the Money Go?

After driving around my neighborhood on Long Island yesterday to survey the damage done by Hurricane Sandy, I’m changing my forecast. I think we will be without electricity for much longer than a week. Power lines are down everywhere. Many are supporting broken trees that are dangling dangerously over the roads. The repair crews can’t even begin to do their jobs until all the tree debris is removed. I was hoping to see an army of workers repairing the damage. Instead, they were nowhere to be seen.

 

I have some advice for our leaders in Washington. Next time you folks decide to spend $800 billion to stimulate the economy, do so on a national infrastructure program to bury all the power, phone, and cable lines. This sensible idea was conveyed to me by one of our accounts in Geneva in an email message yesterday: “[We] are baffled by the phenomenon of the US constantly losing power, whenever there is a storm. Why aren't US power lines underground? Nobody here in Switzerland has seen a power line above ground since their childhood--they've all been placed underground, so they are safe from the elements. And there are no power losses in the country…no matter how heavy a snowstorm or a windstorm!”

Burying all those utility lines would certainly be a good stimulus program for the economy. The American Recovery and Reinvestment Act (ARRA), passed by Congress in February 2009, supposedly allocated a significant portion of the $800 billion in stimulus money on “shovel-ready” construction projects. I don’t believe these included burying wires and cables. So where did all the money go?

Public construction spending by federal, state, and local governments actually peaked at a record high of $326 billion (saar) during March 2009 and has been trending down since then! It was down 15.5% from the peak to $275 billion during August. VP Joe Biden was in charge of monitoring the ARRA’s outlays. I’m surprised that Paul Ryan, during his debate with the all-smiles VP, didn’t ask, “Where did all the money go?”

If all that money had gone into construction, then the industry would have greatly expanded its payroll tally, which has been flat-lining around 5.5 million workers since 2010, more than 2.0 million less than the record highs of 2006 and 2007. Digging down into the data on public construction, the only uptrend since 2009 is in spending on health care facilities. There are downtrends in spending on education, sewage & waste disposal, power, and water supply structures, with transportation facilities turning up recently.

Today's Morning Briefing: Some Bad Breaks. (1) Plenty of damage in the neighborhood. (2) Digging ditches to get out of the ditch might have been a good idea. (3) Question for the Veep: Where did all the money go? (4) Maybe the shovel-ready projects weren’t ready. (5) ADP replaces its old numbers with new ones. (6) Waiting for Jack’s next tweet. (7) Waiting for the next “One.” (8) Waiting for the power. (9) From outage to outrage. (10) Still expecting yearend rally. (11) Some good news out of China. (More for subscribers.)