07 August 2009

The beginning of the end: economy getting better?

The recent stream of data coming out of the US a priori points towards a compelling economic improvement:
  • July's ISM manufacturing index jumped a very big 4.1 points to 48.9, much better than the consensus at 46.5, pointing to a 50 reading for the August report which would mark the bottom of the manufacturing recession in the US (trough in December 2008).
  • The pending home sales index for June jumped 3.6 percent, the fifth in a row for the best streak in six years. In a further boost, May was revised higher to 91.3 vs. an initial reading of 90.7. Year-on-year rates confirm the improvement, up 6.7 percent in June. It has been a long dreary run but the residential housing sector has hit bottom and appears to be turning higher, confirmed by the Case-Shiller index published last week.
  • Today's job losses came in much lower than expected at 247,000 vs. the consensus forecast for 300,000 decrease, and point to being at or near the end of recession. And the unemployment rate surprisingly edged down to 9.4% from 9.5%. June and May revisions were up a net 43,000. The easing in job losses was seen in both goods-producing and service-providing sectors. The latest numbers brought total jobs lost since the recession began in December 2007 to about 6.7 million, the biggest decline in any post-World War II economic slump.
Despite this better economic background numerous clouds are still hovering around: slow personal consumption, high unemployment, commercial real estate refinancing in the two coming years, etc.

Equity markets have however rebounded in a very strong fashion since the March low, and the June consolidation was short lived: I still believe that it is time to relax and enjoy the holiday period; market must correct in order not to become too overextended, already pricing a strong return to economic growth (the S&P 500 is now pricing a 40% earnings growth and 4.0% real GDP in the coming year as calculated by David Rosenberg of Gluskin Sheff & Associates).