The good news is that it now it looks like US GDP rose 3.1 per cent in the September quarter, from the previous estimate of 2.7 per cent. This is well above trend, which is about 2.4 per cent, and a continuation of the robust US recovery we’ve seen since 2009. Once again forecasts for US economic weakness have proven to be misplaced – average growth this year has been 2.6 per cent in the US. This is solid, above trend growth.
Unfortunately it’s been another bizarre year where the rhetoric about sluggish growth has been inconsistent with the evidence. And that’s been true about global growth as well – the eurozone crisis. There are areas of weakness, sure, but overall global growth isn’t that bad. The good news is that stocks markets have largely ignored all the pessimism and pushed higher throughout.
With everything we’ve gone through and given the failure of the US to enter a double dip recession or the global economy to collapse I suspect it’s only a matter of time before we start to see pessimists backflip. Maybe that can be their new year’s resolutions: to embrace reality.
For me, I think the key mistake they make is to only see what they want in the data – they don’t look at trends. For instance, when there is any soft data, no matter how minor, the denialists jump on it and start talking about weak growth and the like – another recession! But just like in 2010 and 2011 the soft data only proves to be transitory – data is volatile - and when it rebounds pessimists act surprised! That we’ve seen this pattern consistently every year for more than three years is the real surprise for me.
As it turns out, Wall Street didn’t have a great reaction to that stronger growth data. Admittedly other data was more mixed – jobless claims rose to 361,000 in the week to December 15, from 344,000, but even that isn’t a bad outcome. Indeed existing home sales were strong – up 5.9 per cent in November after a 1.5 per cent gain the month prior. Then the Philly Fed had a truly remarkable backflip – up to 8 in December from -11!
It has really only been in the last couple of hours that stocks have pushed decidedly higher. I’m not sure why though. Some press reports suggest it was a news conference from John Boehner in which he suggested he was optimistic. Yet he’s still going with plan B, which the Democrats have said they will reject. Whatever the case, as I write the S&P500 is up 0.5 per cent to 1442, the Dow is 31 points higher at 13283, while the Nasdaq is up 0.1 per cent at 3047.
Commodities had a more sluggish session of it – gold was down another $19 to $1649, copper fell about 2 per cent, while crude was up smalls (0.1 per cent to $90). But otherwise price action elsewhere was non-descript and not worth commenting on really. The Australian dollar still sits around 1.0485, most currencies are little changed from yesterday afternoon and it’s the same with US treasury yields.
Before we get into the calendar, Australia’s budget situation is worth a quick comment. For mine we should already be in surplus and I find it inexcusable that we’re not. The problem is that Australia’s economists have been running around for years talking about how weak growth has been. Unfortunately the reality is quite different. Domestic demand has been well above trend, with consumer spending making a significant contribution to that. Private demand growth has been up around the 6 per cent mark (annualised) since 2010. Well and truly above the 4 per cent average. This allowed ample scope for the government to actually cut spending, not just pretend they were, but actually cut it, and offset some of the crisis spending that we undertook during the GFC. If you were wondering how it is that countries get into trouble, this is it. You are seeing it in action.
Think about it – we have been having a public discussion about Australia’s growth prospects that has been completely detached from reality. The recession call has been made every year since 2009 and if it hasn’t been recession it’s been sluggish growth or some derivation. Consequently, there has been no public pressure for the government to behave prudently.
We’ve had a number of economists from large global investment banks talk about the significant fiscal contraction underway domestically, despite the fact that the government has not cut spending. There has, by definition, been no fiscal contraction. Even the opposition seems at loss as to how to handle this situation. The fact is, we’ve got the lowest interest rates since the 1960’s. Monetary policy is very stimulatory. We already had exceptionally strong private demand prior to rates being cut – and even with all of that, the government could not balance the books. Could not cut spending. That is sheer incompetence on any reasonable assessment.
So for today, the SPI suggests Aussie stocks will rise 0.3 per cent. As far as the calendar goes it’s pretty light. No data for us or really for the region. Tonight we see some data on UK GDP and the public accounts and then for the US the key data is on personal spending and income for November. The final December estimate of consumer confidence (made by Michigan Uni) is also out.
So that’s it – this will be my last Scoreboard for 2012, so I’ll see you in the New Year. 2012 was certainly a very strange year market wise, but a very profitable one nonetheless. Until January then I wish everyone a very happy Christmas, I hope it brings good cheer.
With that in mind, I was recently reminded of something Benjamin Franklin once said. "Beer is proof that God loves us and wants us to be happy” Amen! I’m going to go with that!
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
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