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

In the U.S., 3rd quarter GDP growth was revised upward from 2% to 2.7%. This is somewhat consistent with today’s Purchasing Managers Index (PMI), which showed a slight contraction in manufacturing that in fact translates into an annualized GDP growth number of around 2.3%. Since the PMI peaked back in July, and since the current reading is the lowest since July 2009, I feel that these two estimates of U.S. GDP growth (2.7% and 2.3%) are probably a bit too rosy. In other words, I think the actual growth rate of the U.S. economy on an annualized basis is probably closer to 2%. Said differently, the quarterly number is probably over-stating growth a bit. Looking ahead, GDP has a strong seasonal component as people tend to increase spending towards the end of the year, resulting in low first quarter GDP (the so-called “spending hangover”). So I expect 4th quarter GDP growth to stay above 2%. Globally, PMIs were generally encouraging (Haver Analytics), with more countries improving then deteriorating, and more signaling expansion (>50) than contraction (<50).

 

In Europe, the German parliament approved up to $57 billion dollars for Greece in exchange for austerity cuts, sending the Euro up over $1.30. I do watch the dollar/Euro exchange rate. Economist Robert Mundell has suggested that any time the Euro falls below $1.25 then the dollar is probably too strong (hurting the U.S.), while a Euro above $1.35 indicates that it is too strong (hurting Europe). I see the current rate, which is right in the middle, as somewhat comforting. That comfort level is corroborated by other global risk measures, which have declined markedly over the past 6 and 12 month periods. That tells me that, while Europe is in recession, concerns of a European collapse or of a European debt-led global financial collapse are declining.

 

Cliff Issues: The fiscal cliff is serious and I don’t want to sound flippant. But headlines aside, most investment strategists view the initial stances of both the White House and the Republicans, which are miles apart, as very predictable “anchoring” steps intended to initiate negotiations. Mid-December, somewhere between December 14 and December 21, is considered to be the drop dead date beyond which no agreement can be reached before beginning-of-the-year tax hikes and spending cuts kick in. The highest probability outcome seems to be that of a temporary “piece-meal” compromise (Citi Research), with the wealthy being redefined as earning more than $500,000 per year (couples) rather than $250,000, and with several tax deductions (loopholes) eliminated. A debt ceiling increase will probably be needed by the end of February and is likely to be accomplished as well.