As we enter the final quarter of 2012, the forecast for the US economy points to a modest growth of 1.6%, as suggested by The Capital Spectator’s average econometric nowcast. This figure shows a slight increase from the previous estimate of 1.5% released on December 17. However, this outlook appears lackluster when contrasted with the Bureau of Economic Analysis (BEA) reported growth of 3.1% for Q3. The official data for Q4 will be made available on January 30, when the BEA issues its initial GDP estimate for the last three months of 2012. (Note that GDP percentage changes are expressed as real seasonally adjusted annual rates.)
● The Physics of Wall Street: A Brief History of Predicting the Unpredictable
By James Owen Weatherall
Review via Kirkus Reviews
Weatherall, a young physicist and contributor to Slate and Scientific American, expresses his confusion when experts attributed the 2008 economic collapse to physicists who engineered complex financial products for Wall Street. He explores the unexpected connections between physics and finance, revealing how physicists have been skillfully predicting market trends for over three decades. Notably, hedge fund Renaissance Technologies, staffed by physics and mathematics PhDs, achieved an astounding 2,478.6% return from 1988 to 1998.
According to the Labor Department, private-sector payrolls rose by a seasonally adjusted 168,000 in December, as reported in a recent release here. This figure falls short of my average econometric forecast published just yesterday and is noticeably less than the ADP estimate for last month’s payroll increase. Nonetheless, this report indicates a steady rate of job growth, which is a positive sign that the overall economic profile for December will suggest continued expansion.
The Labor Department’s upcoming update is expected to report an increase of 177,000 private nonfarm payrolls for December, according to The Capital Spectator’s average econometric forecast. This estimate exceeds the projections from a couple of consensus forecasts provided by Econoday.com and Briefing.com by approximately 20,000 to 30,000.
The job market showed significant improvement in December, as reported in the latest ADP Employment Report. Private sector payrolls jumped by 215,000, marking a notable increase from the upwardly revised gain of 148,000 in November. This represents the highest monthly increase since February, suggesting a positive outlook for the upcoming official payroll report from the US Labor Department.
The unusual dynamics in the financial markets persist into the new year. Specifically, I am referring to the surprisingly strong positive correlation between the stock market and implied inflation forecasts, derived from the yield spread between the 10-year Treasury Note and its inflation-indexed counterpart. Historically, rising inflation expectations have not typically ignited bullish sentiments among investors, yet this trend has reversed in recent years. Presently, when the Treasury market anticipates higher inflation, equities tend to rise accordingly, and vice versa. This intriguing pattern has characterized much of the past five years, raising the question of whether it will carry on into the new year.
The manufacturing sector concluded 2012 on a positive note, as indicated by the ISM Manufacturing Index report released today for December. The index rose to 50.7, up from 49.5 in November, with a value above 50 denoting growth. This slight uptick suggests that the manufacturing sector is moving towards a more optimistic trajectory.
Investors holding risky assets experienced a favorable year in 2012. The Global Market Index (GMI), a diversified benchmark encompassing major global asset classes, reported a robust total return of 11.0%. This represents a significant recovery from the previous year’s disappointing decline of 1.1%.
A new fiscal deal appears to be taking shape as we welcome the new year. For now at least: “President Barack Obama and Senate leaders reached an agreement on a New Year’s budget that will raise income tax rates for the first time in nearly twenty years, extend unemployment benefits for millions, and mitigate the anticipated spending cuts associated with the so-called ‘fiscal cliff.’” One might say this is merely a temporary fix. Although, with the House still needing to approve the legislation, it remains to be seen if we will be celebrating or lamenting. Prepare for either scenario.
This entry serves as a closing for the year, along with a look forward at how manufacturing activity fared in December, as per the ISM report set to be released later this week. With the ongoing uncertainty surrounding the fiscal cliff, the stakes for the December ISM Manufacturing Index update are notably high. The Capital Spectator’s average econometric projection anticipates a reading of 49.9, indicating a slight contraction, which contrasts with consensus predictions that generally remain above the neutral 50 mark.
