August 2012 Economic Overview (Part 1)

The U.S. economy added 163,000 jobs in July, beating consensus estimates. This recent data raised the average job additions over the last five months to 106,200. This number is just under the rate required to keep up with population growth. In other words, there has been no net job growth for several months. This compares to a much more impressive monthly rate of 252,000 for the three months from November 2011 to February 2012. In addition, the unemployment rate rose slightly to 8.3% in July from the 8.2% reading from June.

Estimates for job growth through the remainder of 2012 are quite optimistic in our view, in excess of 170,000 each month. While this type of job growth is possible due to seasonal and other factors, we remain doubtful due to what we believe will be a continued loss of momentum in the economy for at least the next 2-3 months.

Upon release of the jobs report last Friday, the U.S. markets mounted a strong rally. Today, Asian and European markets responded positively to the surprising jobs data from the U.S. However, this U.S. employment data-driven rally makes no sense for those who are real investors because the U.S. and global economic trend is weakening. Real investors manage risk and look ahead.

We have even begun to see softness in productivity. As discussed last month, after the first phase of revisions, U.S. GDP for 2012 Q1 remained at 1.9%. More recently, preliminary GDP data for Q2 fell to 1.5% as we had anticipated.

We expect the U.S. economy and earnings to trail off through much of 2012. But this is something we warned about several months ago. Thus, we have previously factored these projections into our market forecasts. Regardless, it is important to take note of the short-term disconnect between stock market performance and forward earnings and economic data.