Economic Notes – January 7, 2013


Written by: Jon McGraw

(+) The ISM manufacturing index rose to 50.7 in December, a bit better than the 50.5 forecast figure, while the details were a bit mixed. Employment and supplier deliveries gained, while production declined a bit.

(+) The ISM non-manufacturing index rose from 54.7 to 56.1 in December, which was just a few points above the forecast 54.1. As it turns out, this was the highest level in ten months, and was the result of higher readings in new orders, inventories and employment, while business activity overall fell a bit.

(-) Construction spending fell -0.3%, which was a contrast to the +0.6% gain expected. It seemed the non-residential side resulted in most of the weaker result, as residential building was up +0.4% on the month and +18% on the year. Considering the environment we’re currently in (housing rebound), it’s likely more helpful to look at the residential and non-residential sides separately.

(-) Factory orders for November were flat, which was a lackluster report relative to expectations for a +0.4% increase—growth over the quarter overall has been quite tempered.

(+) The ADP employment report on Wednesday was a quite a bit better than analysts thought, with job gains of +215k versus a forecasted +140k increase (in addition to an upward revision from November of +30k jobs). Mid-sized firms, relative to large and small firms added the majority of job gains to the bottom line. From an industry perspective, construction experienced an increase of almost 40,000 jobs (better housing environment and likely hurricane rebuilding effects), and trade/transportation and professional services gained strongly.

(-) Initial jobless claims rose to 372k, 12k higher than the expected 360k for the Dec. 29 ending week. This was in addition to a Dec. 22 prior week revision of 12k more claims than previously reported. Continuing claims for the Dec. 22 week came in at 3,245k, which was a bit higher than the 3,210k expected. Note that, due to the holidays, claims for nine states were calculated using estimated data, which corrupts the results somewhat.

(0) The employment situation report was very similar to what was expected. The nonfarm payroll figure came in at +155k, which was a bit better than the +152k consensus number. The largest job gains occurred in health care and education services, while construction also saw a sizable increase due to some hurricane construction efforts. Services is really where the job growth in America is coming from.

(0) The unemployment rate was reported at 7.8%, which was a tick above the expected 7.7% level and in line with last month’s revised number (up a tick from the original report). Some of the peripheral data, such as hours worked (moved from 34.4 to 35.5) and average hourly earnings (up +0.3%) was a little better than expected. Wage growth for the entire year at just over 2%, so no inflation pressures creeping up here quite yet.

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Stocks started the year Wednesday with a huge gain—a relief rally of sorts with fiscal cliff concerns alleviated for the time being. In the S&P, every sector was up strongly—led by energy and financials, while more conservative health care and utilities underperformed on the week. Small caps led large caps with returns being fairly risk-oriented.

Earnings season is starting in the coming week, with results that are sure to be the primary driver of markets. We are expecting continued choppiness for the first half of this year, with some strengthening by the second half of 2013, assuming conditions continue to normalize and we are able to handle exogenous events such as the fiscal cliff, debt ceiling debate and Europe.

While positive, foreign stocks underperformed the U.S. group, which was not a surprise considering the U.S.-focused fiscal cliff backdrop. With more optimism afloat, stocks from China, Greece, Spain and Mexico led the way, while ‘core’ EAFE regions Japan, France and Germany lagged. However, most everything was up—it was generally a matter of degree.

Government bonds lost major ground on the ‘risk-on’ moves into equities, and resulting higher rates. The 30-year Treasury is back above 3.0% for the first time in several months. However, holdings in corporate debt, such as high yield and floating rate performed strongly on the week—which was reflected in our portfolios. Emerging market debt was roughly flat, while foreign developed market debt lagged.

U.S. mortgage and industrial REITs were the best performing of the real estate group, while European and Asian REITs lagged on the week.

Commodities were led by the economic growth-related pieces—industrial metals and energy, both up about 1% on the week. Copper and crude oil specifically were strong. Agriculture was the worst-performing sub-sector, down over 2%, mostly due to grains and sugar.

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