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More good news



Third quarter GDP today was revised down by a few billion dollars, but that's old news. The more recent news provides more evidence that fourth quarter growth will be stronger, and the U.S. economy continues to beat the market's rather dismal expectations. 


Seasonally adjusted unemployment claims once again surprised the market by coming in lower than expected (364K vs. 380K). This is the best reading we've seen since the recovery got underway, and at the rate we're going we should see further declines in claims in the weeks ahead. Businesses have pared costs and employees to the bone, so they are likely to fire a lot fewer people than usual as the holiday season winds down.


The ongoing decline in claims is an excellent indicator that the outlook for the U.S. economy is improving, so we should also see the equity market forge ahead to higher levels, as this chart suggests.


The ongoing decline in implied equity volatility (the Vix index) also argues for higher equity prices. With the news showing that the U.S. economy is not only not deteriorating but actually improving, despite the anguish in the Eurozone regarding PIIGS defaults, this removes an important source of uncertainty, and less uncertainty is almost always good for equity markets.


I'm usually reluctant to place much stock in the Conference Board's Leading Indicators, but they do not even remotely suggest that the U.S. economy is in trouble. Fourth quarter real GDP growth is now looking to be in the 3-4% range.


Consumer confidence usually lags reality, so the somewhat stronger-than-expected increase in the December Michigan Consumer Confidence survey reported this morning is simply confirmation that things haven't turned out as bad as most people were expecting. Confidence has picked up of late, but it is still at extremely low levels from an historical perspective. That's the recurring theme we've been seeing since last summer: markets and consumers were braced for a serious deterioration in the economic outlook, yet the economy has actually managed to improve somewhat. But the market is still climbing walls of worry, since on balance the market is not yet even slightly optimistic about the future. After all, we have yet to see the fallout of the Greek default which will almost certainly happen soon.

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