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Notes on the Week Ahead- Blaming the Refs

October 9, 2012

The September jobs report showed a surprising drop in the unemployment rate to 7.8% from 8.1% in August, with the household survey showing a huge 873,000 gain in the number of people who said they were working.  The payroll numbers were less robust, with just 114,000 jobs added, but solid upward revisions to the prior two months made this report a heartening one for the economy and a useful one for the President.

This led many commentators on Friday to argue that the government was somehow “fixing the numbers”. 
-David Kelly, Chief Global Strategist

Blaming the Refs

Americans, as a rule, are pretty passionate about sports and this sometimes impacts their judgment.  In a hard-fought football game, when a call on the field goes the wrong way, it is amazing how many fans shout themselves hoarse maligning the refs.

Last Friday, we saw a similar spectacle involving politics and economics.  The September jobs report showed a surprising drop in the unemployment rate to 7.8% from 8.1% in August, with the household survey showing a huge 873,000 gain in the number of people who said they were working.  The payroll numbers were less robust, with just 114,000 jobs added, but solid upward revisions to the prior two months made this report a heartening one for the economy and a useful one for the President.

This led many commentators on Friday to argue that the government was somehow “fixing the numbers”.  There is, in fact, absolutely no evidence that this is the case. As someone who has worked with analysts from the Commerce department for many years, I have never had reason to question their integrity and it is very unfair for political commentators to do so.  Quite possibly quirky seasonal factors played a role in the huge household survey gain and it would not be a surprise to see some of it reversed in the far more important jobs report due out on the Friday before the election.

More broadly, however, no matter how strongly some investors may disagree with current fiscal or monetary policy, it is important to look at the U.S. economy with a dispassionate eye and acknowledge some positive signs.  These include rising vehicle sales, rising home-building activity, better-than-expected readings on the ISM surveys for both the manufacturing and services sectors and increases in home prices and stock prices that seem to be boosting consumer confidence. 

It is not all good news – manufacturing is clearly being hurt by slow overseas economies, commercial construction seems to be pausing again and the upcoming earnings season promises to show no better than flat numbers on a year-over-year basis.  However, the fact remains that the economy is gradually improving - a theme that should be evident in numbers due out this week also.

On Wednesday, the Treasury Department will release its estimate of the Budget Deficit for fiscal 2012 which ended on September 30th.  Unlike last year, when calendar quirks boosted the deficit, timing issues should help this time, with the Congressional Budget Office now expecting the deficit to come in at just under $1.1 trillion or 7.0% of GDP.  While this is still a huge number, it does represent gradual progress since the deficit peaked at 10.1% of GDP three years ago.

On Thursday, International Trade data could show a slight further improvement in the trade deficit for August as U.S. exporters continue to post small year-over-year gains despite a very tough environment.  Meanwhile, both Import Prices on Thursday and Producer Prices on Friday should show fairly strong increases, largely due to the energy sector.

Thursday night should provide some interesting television as Joe Biden and Paul Ryan present a very strong contrast in both ideology and personality in their vice-presidential debate.  The partisans on both sides, from the comfort of their couches, will score the debate very differently and, undoubtedly, feel even more passionately about the direction of the nation after it is over.

However, for investors, it is important to keep political emotions in check.  In investing, a dispassionate view is always the best and that logical perspective today suggests an improving economy that should, over the next few years reward those who remain balanced or, better still, are willing to add a little risk to their portfolios.

 

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Wednesday,  October 10th