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Sorting the Wheat from the Chaff in Media Economic Reports

10/25/2012 by

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The world economy is continuing to muddle through. There’s little doubt it’s a struggle.

Sometimes the latest economic numbers look great. Sometimes they look like we’re heading back into the tank.

The media seems to relish the uncertainty. To be fair, news outlets (of which the company I work for is one) has to report the data it receives.

But one has to wonder if there isn’t a bias towards negativity, because that’s what attracts the interest of readers. Optimism is boring. Doomsday scenarios titillate. 

For example, almost every news story about the U.S. economic outlook mentions uncertainty due to the “fiscal cliff” that’s looming on December 31st. This is $600 billion in automatic spending cuts and tax increases scheduled at the end of the year.

Smacking into the fiscal cliff is not going to happen. The politicians will fix the problem right after the Presidential election on November 6th, regardless of who wins. Count on it.

The headlines can often be confusing. Here’s an example of a story that nominally seems to offer good news. Bloomberg recently ran the following story, “U.K. Economy Surges 1% as Britain Exits Recession”.

My initial reaction was, “That’s terrific. Maybe Europe is finally getting its act together.” 

Then I read the story. In this year’s third quarter, Britain had its fastest growth in five years. An extension of the government’s bond purchase plan might not be needed, at least until next spring.

The U.K. has been running a QE operation (i.e., printing money) similar to what the U.S. has adopted. The Bank of England has pumped the equivalent of nearly $600 billion U.S. into its money supply.

This is all okay so far. Then I started reading the details. There’s a story behind the story and I should have guessed it immediately.

The U.K. derived its Q3 lift from the Summer Olympic Games. Spending by tourists, athletes, the broadcast networks and so on provided a significant lift to the economy. Eliminate that effect and the true growth rate was probably in the range of 0.2% to 0.4%.

Let’s return to the U.S. scene. For September, the Bureau of Labor Statistics announced a decline in the unemployment rate from 8.1% the month before to a current level of 7.8%.

Then Jack Welch, the much-respected former head of General Electric, tweeted what was in effect an accusation. He wondered publicly if maybe the jobless number had been doctored to help the incumbent in the Presidential election.

He later recanted, but the damage had been done. Impugning the honesty of government workers was not really his intent. That misses the point. Mr. Welch’s action was unfortunate from a broader perspective.

It was hardly a case of everyone getting together and cheering good news for a change.

I guess it’s perfectly understandable in the context. Election sentiment in the U.S. is currently at a fever pitch. 

Do you want another example? Take the U.S. initial jobless claims number. It has been bouncing around wildly of late. For the week ending October 6th, it fell to only 342,000, the lowest in five years.

Then the next week, it jumped back up again to 392,000. The explanation offered has been that the time of year is making the calculation of seasonally adjusted numbers very complicated.

That sounds lame. In any event, for the latest week ending October 20th, the number of first-time people seeking unemployment insurance fell back again, to 369,000.

Another story features the outlook for a company trendsetter, Caterpillar Inc. It expects its sales growth next year to be the slowest in four years.

The company’s backlog of orders is in decline. Over the past several years, Caterpillar’s success has been closely tied to export markets, particularly in the emerging world.

Let’s look at the numbers more closely. What degree of sales slowdown is the company contemplating. Caterpillar’s year-over-year sales grew 31% in 2010, 41% in 2011 and an estimated 13% this year.

According to Bloomberg Revenue, Caterpillar is projecting sales in 2013 will be from 5% below to 5% above 2012 results. Is that so bad? At the least, it implies continuing forward progress.

Alcoa Inc. has recently announced it will be cutting capacity by 12% next year. That sounds like a market in freefall. Hang on, what’s the bigger story?

China accounts for over 40% of world aluminum demand. It has increased output and is now sitting with more inventory than it needs. This situation is expected to persist through next year.

Despite what’s occurring in China, global aluminum demand, which rose 13% in 2010 and 10% in 2011, is expected to climb 6% this year. Again, that may not be all we would like it to be, but it is motion in the right direction. 

In my own personal estimation, the sum of news is breaking mainly on the plus side.

U.S. consumers have spent the last several years tackling their financial problems. As a result, the debt-to-income ratio is better, which will provide a spur to consumer spending. This is showing up in strong retail sales numbers.

The U.S. housing sector in September recorded a giant step up in starts, to 872,000 units. Also, permits for more home ground-breakings rose close to 900,000 units. The homebuilding sector south of the border is back in the game.

More homebuilding means more construction work. It also means more retail sales to fill those homes with everything from entertainment systems to welcome mats.

The auto sector in both the U.S. and Canada is almost back to where it was before the recession. Monthly annualized sales in both countries have been moving up at a good clip. Reaching new records is not out of the question.

The manufacturers’ Purchasing Managers Index (PMI) of the Institute of Supply Management (ISM) in the U.S. moved back above 50% in September after spending the previous three months south of that mark. This means the manufacturing sector is growing again.

That’s good news on its own. But also consider the ISM’s PMI for non-manufacturers. This is an advance indicator for the services side of the economy. Its latest reading was 55.1%, up from 53.7% in August. The new orders sub-index increased by 4 percentage points to 57.7%.

To quote directly from the report, “Respondents’ comments … indicate a slightly more positive perspective on current business conditions.”

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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