Initial US economic data belie naysayers

The US economy is beginning 2012 on a brighter note in a sign investors may be too pessimistic.

Payrolls rose 200,000 in December, double the gain in November, a Labor Department report showed yesterday. A weekly measure of consumer confidence ended 2011 at a five-month high. And manufacturers reported their business in December grew at the fastest pace in six months. The combination indicates the world's largest economy has enough staying power to withstand a recession in Europe and a slowdown in China.

"Markets are absolutely preoccupied about the risks from Europe and the US housing market," said John Herrmann, senior fixed-income strategist at State Street Global Markets in Boston, and the second most-accurate US economic forecaster based on data from the last two years compiled by Bloomberg. "Yet we're finding the economy continues to hold together fairly resiliently. We're getting a good handoff from the fourth quarter." Bob Doll, chief equity strategist at BlackRock Inc., the world's biggest asset manager, sees US stock prices rising and yields on Treasury securities climbing this year as investor concerns about the outlook abate.

 

"We don't need Europe to solve all its problems in 2012," he said in a January 5 note to clients. "Since there is a significant 'crisis premium' baked into the markets, avoiding disaster could be enough."

Doll forecasts that US stocks will return at least 10 per cent in 2012, beating foreign markets for a third year, as the nation's gross domestic product expands by as much as 2.5 per cent. GDP grew 1.8 per cent last year, according to the median forecast of economists surveyed by Bloomberg News last month.

The December payrolls report capped four months of declines in the unemployment rate and six consecutive months of jobs gains of at least 100,000, indicating the labor market is gaining momentum heading into a presidential election campaign season that will be shaped largely by the state of the economy.

"We're starting to rebound," President Barack Obama said yesterday at the offices of the Consumer Financial Protection Bureau in Washington. He appealed to lawmakers to extend a payroll-tax cut through the rest of the year to ensure growth continues.

In the latest Gallup tracking poll conducted January 3-5, 36 per cent of Americans said the economy is getting better versus 59 who said it is worsening. As recently as December 1-3, 27 per cent saw the economy improving versus 69 per cent worsening.

Obama's job approval also has been rising up in recent months. The Gallup tracking poll showed Obama with a job approval rating of 45 per cent January 3-5 versus monthly averages of 43 per cent in December and November and a monthly average of 41 per cent in each of the prior three months. The margin of error is plus or minus three percentage points.

Stocks and Treasury yields fell yesterday after William C Dudley, president of the Federal Reserve Bank of New York, said the outlook for unemployment remains "unacceptably high," even though the jobless rate dropped to 8.5 per cent, an almost three- year low. The Standard & Poor's 500 Index fell 0.3 per cent to 1,277.81 at the close in New York.

The yield on the benchmark 10-year Treasury note fell to 1.96 per cent from two per cent on January 5.

At the close yesterday, the S&P index was valued at 13.5 times profits, about four points below the average price-to- earnings ratio since 1980, according to data compiled by Bloomberg.

Investors last year favored bonds over stocks, as they sought refuge from the financial turmoil in Europe. US Treasury securities returned 9.8 per cent in 2011, their best annual performance since a 14 per cent gain in 2008, Bank of America Merrill Lynch index data show. Investors bought the US securities as a haven, with Europe's debt crisis threatening to infect the region's larger economies.

The damage to the US economy from the euro-zone crisis has so far been smaller than forecast, Dominic Wilson, chief market economist for New York-based Goldman Sachs Group Inc, said in a January 4 report. Even so, he cautioned that it's too soon to sound the "all clear."

German factory orders dropped the most in almost three years in November, as the euro-region economy edged toward a recession and global demand weakened.

Orders, adjusted for seasonal swings and inflation, slipped 4.8 per cent from October, when they surged a revised 5 per cent, the Economy Ministry in Berlin said in a statement on January 6.

In the US, export orders rose in December to the highest level in three months, according to manufacturer reports compiled by the Institute for Supply Management in Tempe, Arizona. Production and overall orders were the best since April.

US steel production reached 2.64 million metric tons in November, 19 per cent more than a year earlier, according to the latest data from the Brussels-based World Steel Association. That's the highest single-month output since September 2008, data compiled by Bloomberg show.

Steel inventories have remained low, "which suggests a realistic chance of an ongoing US real and apparent demand-led recovery in 2012," Credit Suisse Group AG analysts led by London-based Michael Shillaker wrote in a January 5 report.

The price of North American hot-rolled coil steel, an industry benchmark, has advanced 9.4 per cent to $700 a ton since the final week of November, according to Steel Business Briefing. That compares with a 2 per cent decline in European import prices to 485 euros ($618) a ton.

US Steel Corp, the largest US producer, will report net income of $367.5 million this year, compared with $24.7 million in 2011, according to the median of nine analyst estimates compiled by Bloomberg. Shares of the Pittsburgh-based company fell 55 per cent last year, the worst performance since 2008. They will advance 10 per cent to $31.39 in the next 12 months, based on the average of 14 analyst estimates.

Stepped-up consumption of steel is driven partly by improving car sales. Demand at Ford Motor Co, General Motors Co and Chrysler Group LLC exceeded analysts' forecasts in December, according to data released January 4. Ford's US sales climbed 10 per cent from a year earlier, while purchases were up 37 per cent for Chrysler and 4.5 per cent for GM.

The increase is paced by improving employment, Don Johnson, GM vice-president for US sales, said on a conference call with analysts. "Consumers are more confident and other underpinnings of our economy are either stable or slowly improving," he said on January 4.

The Bloomberg Consumer Comfort Index climbed to minus 44.8 in the week ended December 31, the best reading since mid-July, from minus 47.5 the prior week.

Companies added 1.64 million employees in 2011, the best year for the American worker since 2006, after a 940,000 increase in 2010. Even with the gains, little headway has been made in recovering the 8.75 million jobs lost as a result of the recession that ended in June 2009.

Employment will pick up this year, as the economy strengthens and productivity growth wanes, said Joseph LaVorgna, chief US economist for Deutsche Bank Securities in New York. He forecasts that payrolls will rise 2.6 million.

The US probably expanded at a 3.6 per cent rate during the fourth quarter, according to Macroeconomic Advisers. That would be the fastest since the second quarter of 2010 and double the third quarter's 1.8 per cent. The St. Louis-based forecasting company sees growth slowing to two per cent in the current quarter as a recession in the euro area begins to take a bigger toll on the US

"The tide is beginning to come back in," James Glassman, senior economist at JP Morgan Chase & Co. in New York, said in a radio interview on "Bloomberg Surveillance" with Tom Keene and Ken Prewitt. "We've got a long way to go. This is all positive, though, that we're actually moving forward, and that's an important trend."