The media frenzy over Harold Camping’s prediction that the world would end last weekend is a sad commentary on the state of domestic news reporting. I particularly enjoyed coverage of Camping’s admission that he had miscalculated the date (which is now Oct. 21, 2011, in case you want to prepare).
An equally dubious doomsday cult holds sway on Wall Street today: Bearish commentators who predict that the sky will cave in.
Make no mistake about it: US economic data have softened over the past month and a half. But alarmist rhetoric about the economy “hitting a wall” is vastly overdone and reminiscent of the calls for a double-dip recession last summer.
At this point, recent weakness in economic data appears to be a temporary soft patch–not the beginning of another recession.
That being said, my outlook will change if I see signs of a more dramatic downturn or persistent weakness in the key indicators that provided advance warning of the Great Recession and enabled me to call the end of this historic contraction before the National Bureau of Economic Research gave the official word.
In last week’s issue of Personal Finance Weekly, I highlighted a worrying trend: the major uptick in jobless claims over the past few weeks.
Last week, I argued that seasonal adjustments, coupled with a handful of special factors, have contributed to the recent spate of disappointing employment data. For example, a shortage of car parts from Japan has caused a temporary slowdown in the automobile industry, making the economy’s recent wobble appear worse than it actually is.
Last week’s data on initial jobless claims support this assessment.
Source: Bloomberg
The number of initial jobless claims–people filing for first time unemployment benefits–has trended steadily lower since the beginning of 2009.
This rate of decline slowed last summer, but quickly resumed by the end of 2010 and into early 2011. When initial jobless claims spiked in early April, this sudden shift alarmed investors.
This improvement reassures me that temporary factors are the main driver behind the weakness in initial claims data.
However, I will watch these numbers closely in the coming weeks in case they flash a warning sign about the direction of the economy.
What’s more troubling is the recent weakness in the Institute for Supply Management’s Non-Manufacturing Purchasing Managers Index (PMI). I see no reasonable explanation for its recent deterioration other than actual softness in the service sector of the economy.
Source: Bloomberg
Manufacturing and Non-Manufacturing PMI are among my favorite leading indicators of US economic health. Readings above 50 indicate growth, while levels under 50 suggest contraction. The general rule of thumb is that a reading below 46 or 47 indicates that the economy is headed for recession.
As you can see, the Manufacturing PMI is hovering above 60, a reading that’s consistent with overall economic growth of about 4 percent–quite a difference from the 1.8 percent pace logged in the first quarter. Meanwhile, Non-Manufacturing PMI pulled back sharply in April, to levels last seen in summer 2010. Nevertheless, this leading indicator still indicates that the economy is growing.
But the severity of the decline bears close watching.
Bottom line: The US economy appears to have hit a soft patch. This growth scare acts as a headwind for stocks and has hit high-flying commodities.
Looking beyond the next month or so, I see this as a wobble not a downturn; the US economy should grow by roughly 3 percent in 2011.
Rocky, But Not as Bad as 2010
You should be aware of these headwinds and adjust your investing strategy accordingly.
But don’t let the doomsayers make you panic: The US isn’t headed for recession this year. In fact, I believe investors are overreacting and this decline will ultimately prove a solid buying opportunity.
First, it’s worth noting that although recent data have weakened, we’re a long way from levels that would indicate outright recession.
Second, because the Non-Manufacturing PMI is based on a survey of companies in service-related industries, it’s logical to assume that the spike in oil prices may have had a temporary impact. If that’s the case, the subsequent pullback in oil should be a positive. I’ll be watching to see if this holds true.
Next week, we’ll talk about the European debt crisis that’s once again front-page news, plus I’ll review my No. 1 indicator for measuring the health of the economy.
This little-known indicator has correctly predicted key turning points in the market since 1959 and it’s a key to our Personal Finance investing strategy. (If you want to learn more, get a free copy of my new report, Wall Street’s Stop and Go Light for Making Obscene Profits.)
As I’ve said, this market faces some serious headwinds. And it could be a rough summer. If you don’t want to go it alone, put our investing experience and strategy to work for you.
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