Recent data indicates that applications for unemployment benefits declined once again last week, strengthening the argument that the surge in new claims around November 11 was primarily a temporary impact of Hurricane Sandy. Over the past three weeks, claims have consistently decreased, significantly reducing the numbers to levels that were prevalent before the storm, although they remain slightly elevated compared to that period. At present, this trend offers more confidence in predicting that slow growth will continue to characterize the labor market.
Yesterday’s report on the ISM Services Index provided a positive contrast to the decline observed in the ISM Manufacturing Index. These two indicators suggest that one might not accurately reflect the current state of the business cycle. While the manufacturing index signals a potential weakening of the economy, the services data presents a different narrative.
The latest ADP Employment Report indicates that private payrolls in the U.S. saw an increase of 118,000 last month. This represents a slowdown from the 157,000 jobs added in October (seasonally adjusted). Many economists attribute this deceleration to the adverse effects of Hurricane Sandy, which seems reasonable at this point. Nevertheless, the ADP report suggests that we should remain cautious, as the official November payrolls report from the Labor Department, set to be released on Friday, is expected to reflect similarly subdued job growth.
What arguments support the idea that the U.S. economy will continue along a slow-growth trajectory without slipping into recession? While there are fewer supportive statistical indicators these days, some of the strongest—albeit relative—points are payroll increases and the recovery in real estate. Today, ADP’s estimate (scheduled for 8:15 am ET) is anticipated to show a slower job growth rate for November; however, this decline does not negate the idea that the economy is still progressing. The emerging recovery in real estate is another source of optimism, provided it can be sustained.
Examining the business cycle in real time can be a challenging endeavor that often leads to misinterpretations, likely exacerbated in the current climate. The usual factors of uncertainty are compounded by the high-stakes negotiations surrounding the fiscal cliff in Washington, a continuing recession in Europe alongside a potential fiscal crisis, and the question of whether Hurricane Sandy’s lingering impact is skewing incoming data.
The initial assessment of economic activity for November suggests that we should temper our expectations. The ISM Manufacturing Index fell to 49.5 last month, marking the first drop below the neutral 50 mark since August. This new data point could indicate a genuine downturn in economic activity, or it might be a distortion resulting from Hurricane Sandy’s effects on economic trends. The answer to this question lies in the near future, beyond current speculation.
The fiscal cliff looms closer in the U.S., while the recession in Europe continues. Nevertheless, major asset classes saw a modest gain for November. The Global Market Index (GMI) rose by 0.8% last month, bringing its year-to-date increase to 9.8%. The standout performer for November was foreign stocks in developed markets, represented by MSCI EAFE, which advanced by 2.4%. However, its fixed-income counterpart, the Citigroup World Government Bond Index excluding the U.S., faced losses, followed closely by REITs, with each posting a decline of 0.4%. Overall, the month showed no substantial red ink.
● Hedge Fund Analysis: An In-Depth Guide to Evaluating Return Potential and Assessing Risks
By Frank Travers
Excerpt via publisher, Wiley
I recently came across a financial press article questioning the efficacy of hedge funds as an investment class. Following a bear market and subsequent market volatility, this piece suggested that investors were beginning to doubt whether hedge funds truly fulfill their purpose and whether the asset class was ultimately viable. Hedge fund managers responded that identifying profitable short positions had become increasingly difficult, as the most promising shorts became overcrowded, leading to short squeezes. The article also claimed that many hedge fund managers had grown overly confident during market downturns, violating core investment mandates and failing to align the liquidity of their funds with that of their investors. Interestingly, this article, titled ‘‘Hard Times Come to the Hedge Funds,’’ was written by Carol Loomis and published by Fortune magazine in June 1970.
October data on personal income and spending presents a disappointing picture, with sluggish growth being a cautious interpretation. The discussions surrounding weak growth often include mentions of Hurricane Sandy, with arguments stating that the devastating storm in late October diminished what otherwise might have been a more favorable month. There is considerable debate regarding the extent to which the weather should be blamed. The Bureau of Economic Analysis acknowledges that the storm impacted wages and salaries to some degree. The overarching implication is that the economy may recover from nature’s setbacks in the future. Therefore, the weather’s toll becomes a matter of future economic implications. Now, let’s delve into the reported numbers.
Lakshman Achuthan of the Economic Cycle Research Institute made the media rounds yesterday, reiterating his firm’s long-held forecast that recession risks for the U.S. are significant (see interviews on Bloomberg and Yahoo Finance). He asserted that the recession began several months back, pinpointing July as the peak of the current economic cycle. He supported his analysis with clear evidence from three key indicators. While his argument sounds logical, it does leave room for skepticism. The primary issue lies in the unclear model presented, as clarity and transparency regarding the underlying dynamics are crucial in cycle analysis—especially when making strong claims about imminent downturns. Unfortunately, such characteristics were lacking in yesterday’s warnings.