U.S. Economic Data Gap Widening Versus Europe

Despite today’s revised GDP growth for the third quarter (revised down from 2.5% annualized growth to 2% annualized growth), the U.S. economy is beginning to show signs of improvement.  We have seen retail sales improving, corporate profits overall looking solid, and even some minor improvement in employment (from 9.2% to 9%).  In fact, initial jobless claims last week fell to 388,000, which was the lowest level in seven months, the Philly Fed manufacturing index, which translates to 53 on an ISM basis, shows a very strong employment component.  Earlier in the week, the index of industrial production beat estimates with an especially strong reading on business equipment. This translates to strong capital-goods investment, which is also a job creation engine.  Retail sales in October also beat estimates, and rose over 7 percent versus October of 2010. Both producer and consumer price inflation dropped slightly in October.  Well-respected economists like John Ryding and Conrad DeQuadros are predicting 3 percent real GDP growth for Q4. Joe LaVorgna even thinks GDP could be 4 percent in the fourth quarter.

Our problem is that we are completely focused on the problems in Europe, which are overshadowing the improvements we are seeing at home.  Stock markets here in the U.S. are being whipsawed day-to-day, week-by-week, as news from Europe roils global markets.  But the reality is that we are (finally) starting to see real progress here, and that will translate to better financial market performance at some point.  It’s that “at some point” that is the 800-pound gorilla in the room.

I believe the key change in perceptions for U.S. investors (and by extension U.S. markets) will come when we see fourth quarter consumer spending results for the holiday shopping season.  As we move into January and begin to get the final results from retailers, I believe we are going to see that, for the first time since the Lehman Brothers failure in late 2008, consumers are gaining real confidence in the future of our economy and are spending money again.  I still feel that they will be looking for bargains, but when they find them, they will pull the trigger.

If the divergence between U.S. (positive) economic improvement and negative news from Europe continues, I believe that U.S. investors and consumers will eventually begin to focus on what is happening here with our economy and will therefore start to look ahead to 2013 and beyond with optimism.  I further believe that this optimism about the future will translate to positive stock market performance, improving employment, and a much stronger economy, notwithstanding the rapidly growing national debt, which is now above $15.3 trillion and rising very quickly ($122,000+ per taxpayer, and $49,000+ for even man woman and child (citizen) of the United States).

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