Very early signs of a stronger world economy and decent if not downright boring earnings releases (unless you were an unfortunate Apple (AAPL) shareholder) combined to drive the market higher last week.
Also helping markets were lots of remarks from politicians, bankers and CEOs that seemed to suggest that the worst of the European crisis was behind us and perhaps things were picking up a little. The Markit Purchasing Managers data seemed at least modestly supportive of those statements, although the improvement in Europe was based mainly on news out of Germany (which is in turn improving shipments to China).
World Data Shows Reasons for Optimism
Although manufacturing is not the linchpin of the economy, it is an extremely important sector in many parts of the rest of the world. Markit/HSBC Purchasing Manager Reports suggest that manufacturing news is getting better across major markets. The flash reports issued last week showed many major markets at multi-month highs, with the more predictive new orders indices indicating more good news ahead.
GDP Report Will Have a Lot of Quirks and Will Not Provide Much Insight
Among last week’s major data reports was the first estimate of UK GDP in the fourth quarter of 2012. The numbers disappointed, but markets were remarkably resilient to this news.
Among this week’s major economic news will be the US GDP report for the fourth quarter. Expectations are exceptionally low with the average being 1.0% versus September's unusually strong 3.1%. The report will be a mess and easy to construe as negative. From my point of view, if consumption (which represents 70% of the report) is above 2%, I will be a very happy camper and the rest of the report is noise.
My forecast for consumption growth of well over 2% represents an acceleration over the third quarter's 1.9% growth rate. Falling inflation and rising incomes should drive this consumption figure with autos being a big help. The decent consumption numbers come despite the negative impact of Hurricane Sandy at the beginning of the quarter and unresolved fiscal cliff issues at the end of the quarter. In fact, these two events probably will end up taking off a quarter to a half-percent from the report.
The negative quirks in the report are likely to include a huge swing in defence spending that added 0.7% to GDP in the September quarter and could take away the same amount in the December quarter. Imports and exports reported in the fourth quarter so far would suggest a modest hit from an increasing trade deficit. The key to exactly how bad the hit is will be determined by the government's estimate of December trade figures (the actual figures won't be available for another two weeks). Given the massive one-month spike in imports for November, it's difficult to guess what the government might estimate for December. However, if trade turns out to be an issue, we usually get at least a small offset in the inventory accounts.
From available data, it's highly unlikely that the fourth quarter will be a GDP barn burner. However, the 1% consensus seems too low. I don't think we will get all the way back to my original 2.0% forecast for the quarter, but I think that 1.5% is achievable.
