Case by Kaess Commentary
Oct. 5, 2012
It’s a new month and a new quarter and some folks are feelin’ good. The benchmark US Dow Jones Industrial Average hit a 5 year-high, buoyed by large drop in the jobless rate to 7.8%, the lowest level since President Obama took office. While this was good news for Mr. Obama, it’s also a new day for Republican candidate Gov. Mitt Romney after a strong performance at the first Presidential Debate. Is this a new dawn?
The headline you’ll hear about is a 0.3% drop in the unemployment rate to 7.8% in September, from 8.1% in August. By contrast, net new jobs rose by a lackluster +114,000 last month (seasonally adjusted), barely enough to keep up with population growth. This triggered accusations that the ‘Chicago gang’ fixed the numbers a month before Election Day. However July and August payroll gains were revised higher by over 80,000 jobs (to 142,000 and 181,000, respectively), and the Bureau of Labor Statistics (BLS) announced benchmark revisions that indicate it had previously underreported job growth by nearly 400,000 earlier in the year. Add in questions about seasonal adjustments (the process to ‘smooth out’ seasonal swings may have an upward bias to autumn/winter) and a very large jump in part-time employment in a survey of households, and you end up with muddled mess.
What we can say is that monthly job gains have averaged close to 150,000 this year, leading to a gradual decline in unemployment, and that the US economy enters the 4 the quarter with slightly faster growth. And we do mean slightly, since growth in the 2 nd quarter was revised down to 1.3% annual growth rate (originally reported as +1.7), and the current flash estimates by leading analysts for the 3 rd quarter are about 1.9%. This is supported by data showing an uptick in home prices, a large jump in applications for new and refinanced mortgages, and the strongest pace of vehicle sales last month since March 2008. They offer reasons to be cheerful, but hardly a celebration.
Markets however have found a sweet spot for the moment, and though many key indices closed lower, they continue to advance. An improving job market has buoyed consumer confidence, triggering an upturn in the use of credit to finance new cars, student loans, and other purchases. That has led to optimism about both quarterly earnings and the upcoming holiday season. At the same time, the Federal Reserve’s policy to maintain low interest rates for an extended period is aimed to mitigate downside risk. The Fed’s actions have been echoed by similar actions by central banks in Europe and Japan.
While central bankers helped get this party started, watch out for possible spoilers. Food prices remain below highs in early 2011 that triggered riots and the Arab Spring, but have rebounded toward highs seen in 2008, which led to crisis conditions in low income countries. Oil prices continue the see-saw trading pattern we’ve had all year and are now back below $90/barrel, but could easily rebound. Geopolitical conflicts continue to simmer, with skirmishes between Turkey and Syria, while economic sanctions against Iran are taking a toll, leading to foreign exchange controls and skyrocketing import prices, which could trigger hyperinflation (and may have already). And European finance ministers meet again early next week amid speculation whether Spain will formally request assistance, while Greece has yet to convince its creditors that it has a credible deficit reduction plan, a prerequisite for disbursement of new funds. And a month from now, 2 assuming a clear election outcome, the negotiations over the expiration of the Bush tax cuts and
‘fiscal cliff’ will begin. Feelin’ good yet? LK
*Thirteen year-old Carly Rose Sonnenclair sings Nina Simone’s classic, Feelin’ Good. (Start at 1:45). And here’s the original by the incomparable Nina Simone.