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VOL. 37 | NO. 37 | Friday, September 13, 2013

The Data Have Spoken

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Each new month delivers a flurry of economic data. The current deluge will weigh heavily on the Federal Reserve’s decision to maintain or reduce quantitative easing. Let’s quickly review the recent releases and handicap the Fed’s taper temptation.

The Data

ISM manufacturing registered at 55.7. Any number above 50 indicates expansion, and 55.7 marks the highest level of activity since June of 2011. The new orders index was particularly strong, signaling increased confidence as we enter the back half of the year.

ISM non-manufacturing registered at a record high of 58.6. With services comprising the lion’s share of the US economy, an uptick in service industry payrolls bodes well for job creation overall.

Construction spending increased 5.2 percent in the previous 12 months through July. July’s gain was the strongest in four years.

Auto sales increased 17 percent to 1.5 million units in August. Maintaining this pace would place U.S. auto sales volume above 16 million, higher than 2007 levels.

GDP came in stronger than expected in the second quarter. The trend indicates a build in momentum, with the last three quarters rising from .01 percent to 1.1 percent to 2.5 percent, respectively.

The unemployment rate down-ticked to 7.3 percent in August, down from 8.1 percent a year ago. Unfortunately, the decline in the unemployment rate accompanies a decline in the labor force participation rate to its lowest level since 1978.

Lastly, the Citigroup Economic Surprise Index hovers near 60 percent, meaning that the recent data has surprised most economists with its strength. They will respond by taking forward estimates higher.

The Decision

The economy appears to be on a solid recovery path at the moment. However, the two variables that the Fed focuses on are less conclusive. The job market is nowhere near its potential, and inflation is well below target. Interest rates on the 10-year Treasury bond have moved from 1.6 percent to just below 3 percent, rendering tapering a self-fulfilling prophesy. The uncertain situations in Syria, and in Washington, D.C., as the debt ceiling debate reprises will also factor into the Fed’s decision. Markets expect a “tiny” taper announcement of $5 billion to $10 billion, which maps to our expectations as well.

Good News is Good News

For years the market has interpreted bad economic data as good news, expecting the Fed to react with monetary stimulus, which stimulates stock market multiples, which stimulates stock prices.

This algorithm held until market multiples became stretched. Now, the market needs earnings growth to lead us forward. So while bad news has been interpreted as good news in the past, markets now see good news as good news.

As recent data releases depicted a strengthening economy, the odds of Fed restraint increased. Previously, this would have led to a selloff in equities. However, as positive data rolled in, the markets moved higher. Momentum in economic data should now translate directly into momentum in the markets. Finally, good news is good news again.

David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.