Is The Economy Really Improving?
The Dynamic Wealth Report
December 2, 2010
by Jay Chernoff, Editor
Every week the financial news is flooded with economic data. There are
reams of stats released to the public concerning anything and everything
relating to the health of the economy. From the housing market and the
labor market to consumer confidence and GDP… it can be daunting for the
average investor to sort through.
To make matters even more confusing, sometimes the data is split between
good and bad news. One indicator may show a healthy economy, while
another is predicting a recession. Conflicting data is confusing and
misleading.
One thing’s for sure… it’s difficult to get a true picture of where the
economy is headed.
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For example, take the glut of economic data we received around
Thanksgiving…
Over a few short days, meaningful data was released regarding
unemployment, GDP, housing, wages, and durable goods. Unsurprisingly,
the news was both good and bad.
So what’s really going on with the economy?
I’ll get back to that in a minute. First, let’s take a look at some of
these numbers…
Durable goods are items which consumers typically own at least three
years. We’re talking automobiles, televisions, refrigerators, etc. Sometimes you’ll see the durable goods number without transportation
goods (cars, airplanes) because it tends to be a pretty volatile
category.
The important thing about durable goods is it’s a good leading indicator
of economic health. Consumers typically won’t make big purchases if
they’re pessimistic about the economy. Who wants to go out and buy a new
refrigerator if you think you’re going to have trouble filling it with
food…
Sure enough, we were treated to a pretty miserable durable goods number
last week.
October durable goods orders dropped a hefty 3.3%. Even without
transportation goods, durable goods still fell 2.7%. No matter how you
look at it, it’s ugly.
And that wasn’t the only bad news…
The housing market is still a mess. In fact, existing home sales in
October fell 2.2%. It’s not just a matter of homes sales increasing
slowly… they’re actually decreasing. In other words, we really don’t
seem to be on the cusp of a housing recovery.
Fortunately, durable goods and existing home sales were just a portion
of the economic stats to hit the tape recently. Those two may paint a
bleak picture, but the rest of the news was a lot rosier.
For a more positive development, look no further than GDP.
For the year through October, GDP was revised up from 2.0% to 2.5%. That’s a big revision and higher than what was expected. More
importantly, it’s a great sign the economy is finally picking up steam.
But here’s the really big news of the week… jobless claims.
New filings for jobless benefits plunged by 34,000 on Thanksgiving week.
That’s a huge deal. Anytime new claims drop by such a large amount,
there’s a good chance people are actually finding jobs.
Some of the drop in new claims may be due to the holiday… but it’s too
big a figure to be just holiday related. It really looks like the labor
market is improving.
As a matter of fact, wages are also increasing.
Private wages increased 0.6% in October. It may not seem like a lot, but
it’s really good news for a couple reasons.
First off, anytime wages rise in a recessionary period, it’s a good
sign. Second, when wages rise at the same time jobless claims drop, it
makes a legitimate case the job market is really improving. We’re not
just seeing some statistical noise.
So back to the original question… how’s the economy really doing?
In my opinion, the economy is looking good. In fact, I think the
positive news would be front page if not for the gloomy European debt
crisis grabbing all the headlines.
The fact is, the labor market is finally showing signs of life. And it’s
the labor market which truly drives economic recovery.
Yes, issues in the housing market are big and hairy. It will take a long
time to sort through the mess. But who doesn’t expect problems in
housing… Besides, it will be less of a beast if a lot more people have
jobs.
As for durable goods, that number can be unpredictable. The big drop in
October could be a simple matter of timing. Consumers might be waiting
to buy the big ticket items over the holiday season. Keep in mind,
that’s when all the big sales are expected.
More importantly, the good news is looking very good. GDP is growing. Jobless claims are dropping. And wages are increasing. It’s hard to
argue with those results.
On any given week, the news may be full of complex and conflicting
economic data. But at least for one week, we can rest a little easier. The economy might be finally getting the recovery we’ve been waiting
for. And now’s the time to start jumping back into the action.
One of the most active ETFs this week is the Energy Select Sector SPDR
(XLE). XLE is up nearly 14% over the last 52 weeks. This ETF tracks an
index of some of the big names in the energy sector. Investors are
expecting energy prices to move higher as the economy heats up.
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