A Check on the Economy

It was a decent week for the markets with the biggest surge coming at the end of the week. The S&P rose 1.6%, the Dow was up 1.4% and the NASDAQ gained 1.9%.

Fueling some of this strength is certainly earnings, but there were also a few positive economic reports giving lending a hand. And of course, there were a few mixed reports to talk about Let’s take a look at four:

Jobs: It Wasn’t as Bad as We Thought

Initial claims for unemployment edged down 2,900 to a seasonally adjusted 340,000. This was less of a drop than forecast by economists, who had projected a 335,000 annual rate. Meanwhile, the prior week’s claims were revised up 5,000 to a 350,000 annual rate. Accounting for the latest revisions, the four-week moving average fell 5,750 to 344,000.

Layoff activity is settling down as we move further away from the complications caused by the government shutdown and the computer glitches affecting California’s claims data.  This is the fifth week in a row that jobless claims have fallen.  However, this modest improvement is overshadowed by a darker trend emerging in the jobs market. Wall Street is still buzzing about why 720,000 left the workforce in October. The worker participation rate is now at a 35-year low of 63.2%.

Pockets of Production Growth and Declines

In October, U.S. industrial output fell 0.1%. What dragged down the headline figure was a 1.1% decline in utilities output and a 1.6% drop in mining production. Meanwhile, manufacturing output rose 0.3% despite a pullback in automobile assembly.  Meanwhile, industrial capacity utilization fell from 78.3% to 78.1%. It’s important to note that October’s headline results came as a surprise to economists, who had forecast a 0.2% gain in industrial production. Even so, the drop in utilities and mining activity shouldn’t have been a shock considering that both of these metrics had surged in September.  Also, manufacturing production has gained for three months in a row, suggesting that the sector recovering from the sluggishness we saw earlier this year.

Let’s Make a Trade

In September, the U.S. trade deficit widened to $41.8 billion, up from a revised $38.7 billion in August. Imports rose 1.2% to $230.7 billion. Notably, automobile and auto parts imports reached an all-time high. Meanwhile, exports retreated 0.2% to $188.9 billion. Imports are now at the highest level since November 2012 and exports have declined for three months in a row.  It’s encouraging to see that domestic demand is rebounding, but we must remember that a larger trade deficit does drag down overall economic growth. So it’s possible that we’ll see economists revise their estimates lower for third-quarter GDP growth in response to these results.

A Slowdown in Stocking Up

In September, wholesalers increased their stockpiles by 0.4%, slightly above the 0.3% consensus forecast. Stockpiles of professional equipment rose 2.3% and computer equipment surged 5.6%. Meanwhile, auto dealerships reduced their inventories by 3%. Sales at wholesalers gained 0.6%, also beating economists’ projections. At the current sales pace, it still takes about 1.18 months for wholesalers to clear their shelves. Wholesale inventories have advanced 2.2% in the past 12 months. This is good news because much of the economic growth in the third quarter came from inventory building. However, I expect to see wholesale inventories and the broader business inventories measure retreat starting next month. The general expectation is that we’ll see a significant slowdown in stockpiling in the fourth quarter.

That’s all I have for you this week. I’ll be back on Monday with the latest market commentary and a fresh set of stock ratings in Portfolio Grader.

Have a nice weekend!

Sincerely,

Louis Navellier

Louis Navellier

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