December 2011 – US Economic Expansion becoming self-sustaining‏

December 2, 2011

Recent economic data in the US continues to be stronger than expected and mostly positive. This is starting to form a positive feedback loop such that the economic expansion, albeit slow, is becoming self-sustaining.










Source:  ISI

This week marks the 9th straight week of stronger economic data.  Employment continues to grow while new unemployment (job losses) is holding steady.  Purchasing Manager and Supply Management indexes are rising and have been above the level that signals expansion for more than 24 consecutive months.  Unit Labor costs (cost to produce 1 unit of output) have risen only 0.4% over the past 12 months, which is significant in that unit labor costs represent ~70% of the cost of producing goods and services. Even consumer confidence is improving  – jumping in November by the largest % since 2003.

On the other side of the pond the Eurozone recession appears to be intensifying. However, I do not feel Europe’s problems will derail the US recovery.

  • “Total Q3 2011 U.S. exports of $1.78 trillion account for 13.3% of U.S. GDP. The International Trade report shows that our exports to the entire European Union account for 18.3% of total U.S. exports. So, exports to the E.U. account for just 2.4% of total U.S. GDP. A severe recession in Europe that reduces Europe’s total imports by 5%, a much larger than likely decline, would cut domestic exports by 0.12%, which barely qualifies as rounding error. Europe is far more of a competitor to U.S. business than a buyer of our products. Canada, with 10% of Europe’s population, imports more from the U.S. than the E.U. and Mexico is about 75% as important as all of the E.U.”  Source: Advisors Capital Management

Also, it appears that European leaders are recognizing that dramatic action needs to be taken, most likely in the form of changing the European Union (EU) treaty to go beyond a monetary union (single currency) to a fiscal union to allow more rigorous fiscal sanctions on member countries.  This will be the topic of the EU summit on 12/9/11 and, if approved, should pave the way for the European Central Bank (ECB) to intervene in the sovereign debt crisis much as the Fed (Federal Reserve) did here in the US during 2007/2008.

Even China, which had been focused on controlling inflation, has signaled a shift toward stimulating growth with a reduction in their interest rates earlier this week.

So what does all this mean?  First, I believe the chance of the US falling back into recession have decreased considerably with the more likely scenario being continued slow growth. Second, I believe that the sovereign debt crisis and economic slowdown in Europe will drag on for at least 2 more years but that it will not significantly disrupt the US economy. Finally, the continued political gridlock here in the US and the situation in Europe will continue to cause severe volatility in the financial markets globally.

What do we do about it? (1)We continue to maintain a disciplined approach to investing (stay diversified, balance risk/reward, stay liquid) in accordance with your investment objectives, risk tolerance and time horizon. (2) We do not get caught up in the “news of the day” and the resulting emotional response.

One last piece of positive news – International Strategy & Investment (ISI) conducts a Christmas Tree Sales Survey each year. Through the first week this year sales are up 6% over last year with sellers reporting many new customers and a continued preference for the larger 8-9ft and 10-11ft trees. Here are some interesting facts about Christmas trees:

  • There are approx. 25-30 million real Christmas trees sold in the US every year.
  • These trees are grown by about 21,000 farms in this country, which employ some 100,000 people either full or part time.
  • The most common Christmas tree species are: Balsam Fir, Douglas Fir, Scotch Pine and White Pine.     Sources: Univ. of Illinois; Nat’l Christmas Tree Assoc.

Please call me if you have any questions or concerns.  Feel free to forward this note to anyone you feel would find it informative.

Although the information included in this report has been obtained from sources we believe to be reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

 Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

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