Yesterday's initial unemployment claims and today's employment data both argue strongly against an imminent recession in the U.S., a view that aligns with a recent and continuing string of upside surprises in the economic data, and the quick extinguishment of recent negative signals from two of our internal models (one designed to predict recession, the other S&P 500 performance).
Payrolls came in at the high end of expectations, with positive revisions to prior months, while the four-week moving average of initial claims is continuing to improve.
Seasonally-adjusted claims are headed in a favorable direction, but as we continue to point out, that volatility of the data in recent years may undermine the accuracy of the seasonal adjustment factors. To compensate, we've been closely watching year-over-year changes in the unadjusted numbers.
As the chart below shows, non-adjusted claims are currently in their normal seasonal spike, which should last through mid-January. The initial read on the week ending December 31 is still well below the 2009, 2010, and 2011 peaks. However, it is still about 6% higher than the 2007 level. Similarly, the seasonally adjusted figure is about 8% higher than December 2007.
Some related takeaways for investors:
Unfortunately, neither set of data indicates that unemployment is likely to fall precipitously, and credit markets have been indicating that payrolls growth could stall in 2012. This means that the U.S. will still have far too large a buffer stock of labor, which in turn will prolong the recovery and likely lead to greater social unrest at the margin.
If federal budget deficits continue at their current high-single-digit levels, and politicians don't threaten to make taxpayers 'pay it back' at some future date, the situation should continue to steadily improve, and the U.S. economy should continue to outperform those of western Europe and the U.K.
If deficit hawks manage to regain influence in Washington, D.C. (which many luminaries of our industry misguidedly hope and pray for) before private sector credit markets have returned to full health (and full health could still be five or more years away), things will likely take a turn for the worse. Otherwise, we should continue to muddle through.
A mudde-through U.S. economy does not mean that U.S. markets will continue to outperform other countries and regions. They may, but the two don't always go hand-in-hand, and relative valuations are less favorable for the U.S. overall as a result of global markets' relative performances in 2011. That said, there are pockets of U.S. financial markets that look very attractive to us.
Finally, the U.S. is unlikely to decouple from the rest of the world (though it stands a better shot than the rest of the world does when the situation is reversed), so events elsewhere will play a critical role in economic and capital market outcomes. Europe appears to have bought itself two to three years of financial peace, but is still likely to experience a recession in 2012. China might still be headed for a hard or at least not-so-soft landing. China's central government has the capacity to manage through it, but its actions could result in significant turmoil in related currency and credit markets, and be detrimental to certain countries and industries.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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