The irrelevance of slightly better U.S. economic data

November 18, 2011

The latest round of reports on the U.S. economy, while hardly the ringing endorsement of a robust recovery, have been a bit better overall. Jobless claims, while still high, have fallen to a seven-month low of 388,000. Industrial output, meanwhile, posted its largest increase since July as factory and mining production expanded strongly.

But investors are far too obsessed with the mess taking place in Europe to pay the modest improvements any mind. Even if Europe’s financial morass were not an ongoing cloud over the U.S. outlook, the incremental gains in U.S. economic activity remain far too modest to warrant any sort of optimism about a substantial decline in unemployment. Moreover, analysts are worried that the current political propensity in Washington for spending cuts rather than renewed stimulus poses another threat to growth.

Thomas Lam at OSK-DMG sums up the sentiment nicely:

Incoming data over the past month or so have been generally more spunky. […] The continued tightening in financial markets and depressed sentiment indicators still imply downside risks to growth in subsequent quarters. But the key driver to the 2012 outlook, at least for the early part of next year, is fiscal policy considerations.

Lam is still forecasting 2012 GDP will come in at 2.4 percent for 2012 as a whole, but that is conditional on additional government spending:

Without additional fiscal stimulus measures to offset the expiring provisions (along with a modest drag from the debt ceiling negotiations), real GDP growth in the first-half of 2012 could average less than 1.5%, with sub 1% consumer spending growth.

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