The Expanding Mismatch Between Reality & Market Expectations

The Economy on Firm Footing…for now

Lending a helping hand to the market rally to record levels was last week’s economic data, which painted a picture of an economic landscape that is on far firmer footing than in recent months:

  • The second estimate for 3Q 2016 GDP was revised upward to 3.2 percent from the prior 2.9 percent;
  • The November ADP Employment Change Report killed it with 216K new jobs in November vs. the expected 160K. That beat, however, was softened by the prior two months’ downward revisions, which kept the 3-month moving average little changed.
  • October Personal Income & Spending saw better disposable income, but spending was hampered by one of the highest savings rates we’ve seen in 2016.
  • The November ISM Manufacturing Index marked the third month of expansion, with the highest reading since June) and several takes on November job creation (inline to a strong private sector, but people still falling out of the labor force big time)
  • The Fed’s latest Beige Book was a mixed bag however. On one had it showed “the economy continued to expand across most regions from early October through mid-November.”  On the other hand, it also called out the strong US dollar as a “headwind to more robust demand.”

Oil — a Second Headwind for the Economy

The Fed Beige Book report mentioned earlier also pointed out that the announced oil production cuts from the latest OPEC meeting that sent oil prices gasping up serve as a second headwind to the domestic economy. Consumers have been enjoyed a 10 percent drop in average gas prices since mid-June that the recent surge in oil prices is likely to erase.

The silver lining to be had should those production cuts hold and oil prices trend higher is the potential for more idled US offshore oil rigs and shale production facilities to come back on stream, generation good paying jobs in the process.