Business Cycle Indicators: Mixed Messages in Data on QE3, Fiscal Cliff

Posted December 14, 2012 by rvillareal

Global Indicators

• GDP focus shifts to 2013. More of the same for the U.S. and Canada, EU contraction deeper and longer than initially thought.  Global PMI data mixed, hovering close to 50.
• Spanish capital flight prompts bailout funds from ECB. Periphery spreads in the Eurozone stabilize with OMT funds available for those who ask.

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U.S. Consumer

• Confidence restrained as Fiscal Cliff negotiations fruitless so far.
•  Consumer spending muted as real income struggles to reach pre-recession levels.

Housing Market

•  The Case-Shiller Index is on the rise, but regional markets show uneven price gains.
• Prices, starts, and sales on the upswing as inventories decline.
• The housing market appears to be recovering, supporting the DE bullish view on the housing sector over the next 18 months.

Labor Market

• ·        Non-farm payrolls restrained in Q4 with a +142K average compared to +168K in Q3. Some firms are cutting costs in case the U.S. goes over the Cliff—which would surely result in a recession.
• ·        Despite lower headline unemployment rate, the duration of unemployment is as high as ever.
• ·        The current slow and steady pace of labor market healing supports 2%-to-2.5% growth. The Fed has added explicit policy targets to try to speed up the process.

Business Conditions

• Both ISM surveys weaker in November.
• Small business sentiment and hiring lag as those firms cut costs in current uncertain environment.

Inflation Measures

•  Industrial production recovers to pre-recession peak, though manufacturing lags.
• ·        Year-ahead expectations elevated, will they unanchor on the new Fed policy thresholds?

Financial Markets

• ·        Earnings forecasts have stabilized along with the outlook, for now. DE expects 6% to 8% y/y growth in 2013 and 2014, with very low interest rates supporting valuations.
• Bond spreads trend lower as investors take on risk with Fed support.

DE Forecasts

• GDP: Less than 2% 2012, down from 2.5%. Q4 close to 1% on impact from Hurricane Sandy. Better next year so long as U.S. avoids Fiscal Cliff, around 2.2%-to-2.5%.
• Unemployment: Moves lower to 7.7% in November, partly on smaller labor force. 7.1% by end of 2013 as Fiscal Cliff mostly avoided and QE3 takes hold.
• Interest rates: Fed lower and longer than ever with QE3 continuing until unemployment hits 6.5% so long as inflation remains below 2.5%. Forward guidance extends into 2015. Global tilt towards easing.
• Equities: Strategically bullish. DE’s fair value estimate for the S&P 500 is 1500 or a bit above heading into 2013. Operating EPS estimate lowered to $107-8 in 2013.

Attached is the latest version of DE’s Business Cycle Indicators. Historical charts are included within. Charts 3, 5, 6, 8, 9, 14, 16, 21, 23, 24 and 25 are new to the publication this month.

Business Cycle Indicators 12-14-12[/private]