The recent macroeconomic indicators show promising developments, offering a dual perspective: one improvement and one decline. The GDP for the third quarter grew at a quicker rate than initially estimated, while jobless claims continue to decrease after a surge in new filings linked to the recent storm. The updated GDP figures indicate that the economy is maintaining a steady, albeit slow, growth trajectory. The decline in jobless claims is also encouraging, despite a somewhat sluggish pace. What implications does this hold? Let’s delve deeper, starting with today’s updates on initial claims.
In the realm of financial economics, one of the most impactful discoveries in recent decades has been the realization that asset returns are indeed predictable. However, this predictability, as discussed in various studies, doesn’t particularly aid day traders. Numerous studies have demonstrated that a) expected returns vary, and b) such fluctuations often follow identifiable patterns influenced by factors like dividend yield and price-to-earnings ratios, especially over medium to long-term periods in the equity market. This revelation caught many economists off guard, including some who have been instrumental in developing indexing methods, which are commonly embraced by investors skeptical of forecasting. While this insight is beneficial, it can also be misapplied, as highlighted by a recent paper from Vanguard.
The Census Bureau reports that new orders for durable goods remained unchanged last month, following a robust 9.2% increase in September. However, if we exclude the volatile transportation sector, new orders actually rose by a noteworthy 1.5% in October. Additionally, business investment saw some improvement, with new orders for non-defense capital goods excluding aircraft climbing by 1.7%, marking the best month since May. This suggests that corporate America’s appetite for investment is still alive. Nonetheless, the overall trend for big-ticket items remains lackluster. Today’s report indicates that while this leading indicator isn’t collapsing, it still fails to provide robust evidence of strong demand.
The latest update from the Chicago Fed National Activity Index (CFNAI) reveals a slowdown in the economy’s momentum last month. Given the declines reported in various October datasets—such as retail sales and industrial production—this deceleration is not unexpected. However, it’s still up for debate whether Hurricane Sandy had a skewing effect on these figures. While it’s possible, the extent of the weather’s influence on last month’s slowdown remains unclear. As the fiscal cliff looms, today’s CFNAI report is likely to raise concerns about potential economic turbulence ahead.
While concerns over the fiscal cliff loom large, recent price trends across major asset classes do not seem to reflect investor anxiety. Our ETF proxies for the key segments of global capital and commodity markets remain in positive territory year-to-date, as of November 23. For the current month, only foreign developed-market bonds and REITs are experiencing minor losses, while the U.S. stock market is riding close to the edge of profitability.
● Antifragile: Things That Gain from Disorder
By Nassim Nicholas Taleb
Summary via publisher, Random House
In this insightful work, Nassim Nicholas Taleb—author of the bestseller The Black Swan—explores the concept of “antifragility.” He argues that just as bones strengthen under stress and chaos can sometimes lead to growth, certain systems, ideas, and businesses actually benefit from adversity and uncertainty. In Antifragile, Taleb proposes a new way of thinking, where rather than merely weathering chaos, we should embrace it as an essential component for survival and growth.
The economic outlook for the fourth quarter has been slightly downgraded following the impacts of Hurricane Sandy. Since our last Q4:2012 nowcast on November 5, the average projection for real GDP growth has decreased from 1.7% to 1.2%, based on five quantitative methods (details listed below). This contrasts with a reported 2.0% growth for Q3, as per the government’s announcement last month. (All cited percentage changes are based on quarter-over-quarter data in annualized terms.) It’s important to keep in mind that we have a considerable amount of time before the Bureau of Economic Analysis publishes the initial Q4 GDP estimate on January 30, 2013. If data presents a favorable post-hurricane recovery, the nowcasts are likely to improve in the coming weeks. For now, let’s examine how The Capital Spectator’s current nowcasts compare.
A day to unwind, reflect, and express gratitude. This autumn feast, reminiscent of the original banquet shared by the Plymouth colonists and the Wampanoag Indians in 1621, feels especially meaningful for your editor right now. After a long month of recuperation following Hurricane Sandy, it’s a welcome break to contemplate both the victories and losses America has experienced. A thought-provoking quote from one of the classic Thanksgiving essays featured in The Wall Street Journal poignantly states: “We are reminded that despite our societal discord, we remain the longest-enduring society of free individuals governing themselves without kings or dictators. Our unique liberty is as much a blessing as the rich abundance of our land.”
Recent figures indicate a significant drop in the number of newly unemployed individuals last week, a trend that aligns with expectations. The previous report on weekly jobless claims highlighted a sharp increase, attributed largely to weather-related factors; many analysts—including myself—believed this spike did not signal a downturn in the business cycle. Today’s statistics lend support to that relatively optimistic view.
The stock market continues to exhibit a complicated relationship with inflation expectations. This isn’t surprising, considering the existing concerns over the fiscal cliff, the economic forecast, the Middle East, and various other issues. The current economic landscape is somewhat abnormal and is likely to persist for some time, despite some observers struggling to adapt their understanding of inflation to this post-2008 environment.