December Economic Report

A decline in new jobless claims was offset by a higher unemployment rate for November. The decline in new jobless claims may only mean a seasonal recovery in employment but may not indicate that the underlying job market has improved. For many retailers Christmas sales represent a major part of annual sales. To handle the additional sales there is usually an increase in hiring. The seasonally adjusted numbers are always a problem, perhaps more so than normal with the short time between Thanksgiving and Christmas.

The productivity numbers are a puzzle. Given the reported productivity growth through the 90s and more recently, we would expect to be much better off (much lower prices for goods and services) or that actual profits were much greater than reported. It is difficult to accept the productivity numbers as meaningful even though the Federal Reserve seems to emphasize these numbers in suggesting the recovery is under way. While interesting, I would not put much stock in them in financial or business decisions.

Offsetting the post-Thanksgiving sales numbers are the disappointing November retail sales data. The late Thanksgiving weekend this year and the shorten holiday shopping season (Thanksgiving to Christmas) may explain both the disappointing November retail sales and the increase in the weekend-after-Thanksgiving sales increase.

On the negative side, auto sales and housing sales seem to be weakening. The drop in the discount rate by the Federal Reserve does not seem to be having the desired effect on long-term interest rates, at least not yet. In addition we have just begun to see the state and local government budget problems and their effect on local and state spending. State and local revenue problems will be a drag on the economic recovery unless the Federal Government provides some relief (extended unemployment benefits, additional assistance with medical care costs, etc.). The proposals for investment tax credits are unlikely to encourage investment but may reduce tax revenues, thus increasing the deficit. The time it will take for the Federal Government to act, assuming they intend to provide appropriate relief, means it will be late next year before any expected benefit to the economy. Discounting government action, it will be the first quarter until we see whether the economy is truly in a recovery mode.

The Stock Market

The stock market had a nice run the past several weeks, but was it because the recovery is underway or a bear market trap?

The ‘technology sector’ appeared to lead the market in its move up, implying a recovery in business spending on technology. The problem is what we like to think of as the ‘technology sector’ products have become, as most industries do eventually, a commodity. Computers, computer chips, servers, telecommunications all are relatively mature industries with a number of competitors where prices are likely to decline even in a recovery. The high price/earnings ratios of companies in these industries cannot be justified on the basis of continued high gross margins or rapid sales growth.

Historic price earnings ratios for the S&P would suggest the market would continue to move lower. To return to historic levels, even adjusting for lower inflation and projected profit increases for the next year, the S&P could decline to well below 800 with the Dow well below 8000.

Stocks in the News

United Airlines bankruptcy cannot be good news for the economy or the stock market. Besides the impact on the company employees and shareholders it could have short-term impact on other airlines, as bankruptcy would allow United to lower fares to keep operating. If this happens expect other airlines to begin having financial problems.