U.S. Economy Growing at Slow, Steady Pace

Up until just recently, the bulls’ battle cry had been three simple words: “Better than expected!” In short, for the better part of the last month, the economic data for the good ol’ USofA had been coming in above consensus expectations. To anyone paying attention to such things, this steady stream of strong reports suggested that the country’s economy might actually be better than the bears had led everyone to believe. And as a result, stock prices have been adjusted to higher levels.

However, the string of better than expected data came to an end over the past week as the reports from the Chicago PMI, Case-Shiller, Personal Spending, and Consumer Confidence all came in on the punk side. And as one might expect, the discounting of stock prices to the upside also ground to a halt. Although the market did not head lower in earnest, our furry friends assured us that it was only a matter of time before the dance to the downside, which had been put on hold since December 20th, would resume.

But a funny thing has happened on the way to bear party – a new bull thesis appears to have developed. Instead of focusing on the idea that the economy is going to continue to beat every economic report by a country mile ad infinitum, stock market investors appear to have figured out that growth is a good thing. Thus, it appears that the new mantra amongst the glass-is-at-least-half-full gang is “slow and steady wins the race.”

It is important to recognize that the recent economic reports dubbed as “disappointing” weren’t really bad reports. This data did not suggest a slowdown in economic activity or even a potential slowdown. No, the numbers were simply below analyst expectations. And while I will agree that this game is all about reality vs. expectations, at this stage of the game, growth is really the key.

My thinking here is pretty straightforward. Economic expectations for calendar year 2012 are not exactly robust as just about everybody who is anybody in the economic forecasting business has knocked down their projections over the past four months. So, as long as the recent string of “better than expected” data doesn’t turn into a pumpkin at midnight, those same analysts might just have to start adjusting their expectations higher. Not by much, mind you, but higher all the same.

This, of course, leads to the issue of corporate earnings. As I’ve written recently, earnings have increased a fair amount over the past year and are expected to grow at a decent pace this year. So, given that stocks are only modestly higher than where they were at the beginning of last year, there is clearly room for stock prices to rise. And then if we also see some incremental improvement in the economy, well, stocks might be able to tack on few more points along the way.

However, we also have to keep in mind that stock prices don’t usually move in a straight line and that any economic hiccups or surprises from across the pond will likely lead to corrective action. But, if the U.S. economy can continue to grow – even at a slow and steady pace – the bulls may ultimately wind up winning the race.

Turning to this morning… Despite falling yields at French and Spanish bonds auctions and a 2% surge in Chinese stocks, European markets have turned sluggish as concerns relating to the Greek debt swap deal continue to plague the markets. U.S. futures have followed suit and are pointing to a flat to slightly higher open.

On the Economic front… Initial Claims for Unemployment Insurance for the week ending 1/28 fell by 12,000 to 367K, which was below the consensus estimate for 373K and also last week’s revised total of 379k. Continuing Claims for the week ending 1/21 came in at 3.437M vs. consensus of 3.53M and last week’s 3.567M.

Next up,the government reported U.S. Nonfarm Productivity in the fourth quarter of 2011 rose by +0.7%, which was in line with the estimates for reading of +0.7% but below Q3′s +2.3%. On the wage inflation front, Unit Labor Costs rose by +1.2% versus the expectations for +0.7% and Q3′s +2.2%.

David Moenning
Editor:  The Daily Decision