"Kee" Points with Jim Kee, Ph.D.

The gist of last week’s data was positive: “Leading Index: Sustained Growth, No Recession.” So read Wells Fargo Securities’ Chief Economist John Silvia's report last Friday regarding July’s 0.4 percent jump in the Conference Board’s Leading Economic Index (LEI). Basically, mildly positive economic numbers (industrial production, building permits, manufacturers’ new orders, retail sales) continue to indicate a moderately expanding American economy. Indeed, the most recent Wall Street Journal Forecasting Survey (50+ panelists) reports expectations of about 1.9% GDP growth for all of 2012, increasing to about 2.5% for 2013. Inflation is expected to remain close to the Federal Reserve’s unofficial target rate of about 2% through 2013. And recent surveys of nonfinancial companies indicate an uptick in expected business investment spending versus what was reported in May. Finally, the July senior loan officers’ survey indicates an improving small business environment as well (Citi Research). All of these positive indicators are weak by historical standards, but they are positive rather than negative.

In fact, “less Armageddon” seems to be a growing theme. I just attended an analysts breakfast where the lead speaker, a well-known Wall Street strategist, had recently changed his views and felt that the Euro and the European Union would endure and would not collapse. He felt that the statements and actions this summer throughout Europe (European Central Bank, German Chancellor Angela Merkel, International Monetary Fund, etc.) and the U.S. (Federal Reserve, Treasury) all pointed in the direction of no turning back with respect to backstopping Europe and, by extension, the global financial system. Specifically, he felt that Europe no longer threatened to be systemically risky (i.e. a risk to the entire financial “system”). He also felt that the “fiscal cliff” was largely overhyped, in his opinion, because a worst-case scenario of spending cuts and tax hikes would be offset by monetary response on the part of the Fed, and also that the actual evidence with respect to fiscal policy and the economy is more ambiguous than is widely believed (that’s true). In my opinion, the fiscal cliff is less of an issue because markets are pricing expectations instantaneously, so there’s far less of an investment angle - once the outcomes are known - than the headlines would have you believe.


This seems to be reflected by the stock market. Financial headlines today include “European Equities Approach Year Highs” (Financial Times) and “US Markets Approach 5-Year Highs (Wall Street Journal). Companies, of course, are cautious of the global outlook. Concerns still remain high for China, Japan, Europe, and the U.S. And that’s the accurate view….continued slow growth around the world but not the end of the world!