This note was originally published
at 8am on October 16, 2012 for Hedgeye subscribers.
“Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States.”
Former Hedgeye Intern Brennan Turner recently started a company called FarmLead. He has an ambitious goal which is to create the largest online grain trading platform in the recently deregulated Canadian wheat market. Every day Turner sends out a morning recap of the action in the global grain markets from his office in the north Canadian outpost of Saskatoon. Like a true entrepreneur he is focused on growth, and so ends each morning commentary with the salutation: “To growth”.
In recent weeks, we’ve had some government economic data reported in the United States that has suggested growth may be on its way back. I’m not a conspiracy theorist, but under closer examination the data is probably more suspect than reliable. The specific examples I’m thinking of include:
- Advanced monthly retail sales – According to preliminary estimates, retail sales were up +5.4% for the month. This is meaningfully above the 20-year average and an acceleration over the prior month. The caveat is that this is a seasonally adjusted number. In fact, the seasonal adjustment was $22 billion. For comparison, the seasonal adjustment in 2012 was $12 billion. So the biggest growth component of retail sales was the Commerce Department’s seasonal adjustment which was up a staggering 83% year-over-year.
- Jobless claims – Last week jobless claims appeared to show meaningful improvement and fell 28,000 to 339,000. At face value, this is a meaningful week-over-week improvement. The caveat of this number was of course that one “large” state was excluded, which diminishes the improvement.
- Jobs report – Jack Welch probably made the most noise around the jobs report two weeks ago when he tweeted, “Unbelievable jobs numbers … these Chicago guys will do anything … can’t debate so change numbers.” The reality of the jobs report is that the headline number of 7.8% was a misleading statistic, although it likely wasn’t conjured up in the Obama campaign office. The key reason that the unemployment rate is dropping is because labor force participation is literally at 20-year low of 64%.
Not surprisingly there was some furor over Welch’s tweet and as a result he wrote an op-ed in the Wall Street Journal the next day clarifying his statement. A point that is worth highlighting from his op-ed is the following:
“Meanwhile, we're told in the BLS report that in the months of August and September, federal, state and local governments added 602,000 workers to their payrolls, the largest two-month increase in more than 20 years. And the BLS tells us that, overall, 873,000 workers were added in September, the largest one-month increase since 1983, during the booming Reagan recovery.”
Similar to the retail sales numbers, the seasonality reported in the jobs numbers this year appears to be seeing an accelerated adjustment. Once again, this isn’t a conspiracy theory statement, but rather a red flag as it relates to reading too much into some of the recently reported U.S. economic data. Unlike one of our competitors who took up their Q3 GDP estimate yesterday on the back of growth in seasonality adjustments, we are not there yet.
Tonight we are likely to get a lot of discussion about future economic growth in the United States as President Obama meets Governor Romney tonight for the second Presidential debate. The lead in quote from Ronald Reagan was not an attempt at a political statement, but rather an allusion to tonight in which it is likely both candidates refer to predecessors that they hope to emulate to stimulate growth.
According to the average of the most recent six major national polls, this race is basically a dead heat at 47.3 to 47.3. Some of the polls, like the most recent Washington Post Poll that has Obama up three points, still appear to have some Democratic skew (Democratic ID of 35% versus Republican ID of 26%), but in general this race is definitely in the category of too close to call. Tonight, Obama has a chance to re-establish himself, but even so the damage is likely done from the first debate and we will likely stay tight into election-day.
As is typical for modern Presidential politics, this race is once again going to come down to the battleground states. On this front, we will be joined next week on October 24th by Professor Ken Bickers from the University of Colorado, who has done a historical analysis of state-by-state economic indicators as a method of predicting Electoral College results. His work has predicted every Presidential election accurately since 1980. The dial-in will be circulated to our Macro clients in advance, but if you aren’t a macro client and are interested in gaining access to this call please email firstname.lastname@example.org.
Flipping to Europe briefly, Spain has obviously been in the news over the last couple days. It appears that the Spaniards will be requesting some form of aid, which is increasingly likely to be a credit line as opposed to a full blown bailout. The Spanish 10-year, while still below 6.0%, did accelerate over night from 5.72% to 5.83%. As always, though, the root of Europe’s issues are in expectations as much as anything and as it relates to potential Spanish intervention an unnamed Spanish Finance Ministry official said the following:
“He suggested that the day following a request, interest rates on Spanish debt could fall by 150 bps, while the Spanish stock market could surge 15%.”
We’d probably take the other side of that.
Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1739-1769, $112.67-116.29, $79.24-80.06, $1.28-1.30, 1.64-1.72%, and 1419-1444, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research