Rosie: Dodging a bullet, yes – out of the woods, no

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The comments below come courtesy of Dave Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, sharing his latest views on the U.S. economy.

The U.S. employment report for August was uninspiring in the aggregate but the bright spots cannot be readily dismissed. First, the private payroll number came in at +67,000, which was above the consensus estimate of +40,000, not to mention the ADP print of -10,000. This, along with the upward headline revisions of 123,000 and the 0.3% MoM gain in the wage number has the bulls rather excited.

The jobs report, much like the previously released ISM and chain store sales numbers, had the “muddle through” thumbprints all over it, which is why an equity and bond market bracing for a “double dip” scenario have reacted so violently in recent days. The data are hardly strong but admittedly are not consistent with the economy contracting this quarter. But the data do not alter our outlook for a double-dip scenario unfolding before year-end as the policy stimulus continues to fade and the inventory cycle subsides.

While capital spending remains a lynchpin as businesses replace obsolete machinery and equipment, its contribution to overall growth is actually showing signs of receding and we see nothing really in the consumer, housing, commercial construction, net exports or State & local government sectors to get us excited over the macro backdrop.

Now that the financial market sentiment is moving away from the “double dip” outcome, equity investors still have to confront what a “muddle through” scenario is going to mean for corporate profits because we had such a “muddle through” in the second quarter with 1.6% volume GDP growth, which translated, at a time of cycle-high margins, into virtually flat sequential corporate earnings growth. So, it would stand to reason that if there is vulnerability, it is highly unlikely that we will see profits rise 20% in the coming year as is currently the consensus view in the marketplace.

One can easily draw the conclusion from the data that we have dodged a bullet. But that does not mean we are out of the woods. Employment is a coincident indicator. Leading indicators, such as the ECRI, continue to deteriorate and to levels still consistent with nontrivial double-dip risks. Keep this in mind – private payrolls came in at +97,000 in November 2007 and the “Great Recession” began the next month. In other words, the +67,000 tally we saw today basically tells you nothing about how the pace of economic activity is going to unfold as we move into the fall.

Source: David Rosenberg, Gluskin Sheff & Associates – Lunch with Dave, September 3, 2010.

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