The Economy Is Doing Better – So What Does That Mean?
Last week was loaded with important economic data, most of it very positive. There’s good reason to believe economic growth is finally gaining steam. Now investors have to decide if that’s a good thing.
First off, let’s review some of the key data from the previous week.
The biggest news came from the November jobs report. Non-farm employment grew by 203,000 jobs, above expectations. Gains were made in transportation and warehousing, health care, and manufacturing.
Overall unemployment dropped from 7.3% to 7.0%. The annual rate of job growth is holding steady at just over 2%. If this trend continues, the economy should continue on its slow but steady growth path.
Also, in other jobs-related news, initial jobless claims dropped to 298,000 from 321,000 the week before. However, the higher than projected drop could have come from the Thanksgiving holiday, so we’ll have to see what this week brings.
In another positive surprise, GDP was revised significantly higher to 3.6% from the originally reported 2.8%. The big upward revision was driven by higher than expected expansion in inventories. That could be a sign that businesses are expecting increasing consumer demand in the months ahead.
To top off the strong economic data, new home sales soared by 25% from the prior month. That’s the biggest one month gain since 1980!
It’s fairly clear that the statistics are pointing towards a continued improvement in the economy. Although, not all the news was good. ISM Services came in worse than expected. And, disposable income dropped by 0.2%.
Still, it would be difficult for even the most bearish analyst to claim the economy isn’t improving.
Here’s the thing…
The positive data points are going to make the Fed’s tapering decision that much more difficult. The central bank doesn’t want to end stimulus too soon. Nor do they want to risk inflation.
Meanwhile, investors aren’t sure whether they want the economy to improve, as it will mean the end to the Fed’s massive bond buying programs. Stimulus has been good for asset prices… but a strong economy will be even better over time.
Overall, I believe a strong economy will win investors over. The end of tapering may cause a temporary pullback in the market. But, economic growth will ultimately lead to better earnings – and should continue to push equity prices higher.
Yours in Profit,
Gordon Lewis
Category: Breaking News
