What Numbers Are Telling Us

12/17/2012


Why is it so easy to type "teh," yet see it as "the" when we proofread? Because we tend to see what we expect to see. What we want to see.

That phenomenon explains why nobody should make investment decisions based solely on a piece of economic data. An investor may read a statistic — such as the ISM Nonmanufacturing Index's rise to 54.7 in November — and find it easy to interpret. For example:

• The November reading topped market expectations and marked the fourth gain in the past five months. The index rose on the strength of increased business activity and new orders.

The facts above support a bullish argument, but read on.

• Services data related to inventories and trade were soft, and supplier deliveries declined in November. Trade weighed on services growth; consumers have been doing the heavy lifting.

Bears argue that if businesses don't start pulling more weight, weakening of the consumer could stall the recovery.

As you consider such arguments, remember that investors and analysts have biases, and it's not too hard to "interpret" trends to support those biases. Both bulls and bears can find what they want in the ISM Nonmanufacturing Index's November performance. Or in just about any other individual piece of economic data.

That's a key reason why we at the Forecasts try not to rely too much on a single piece of data, or on a single interpretation of that data — even our own. Above all, we intend to listen to the stock market, and we'd view a breakout above this year's highs of 13,610.15 in the Dow Industrials and 5,368.93 in the Dow Transports as confirmation that investors expect better times ahead.

The bigger picture

The Blue Chip Economic Indicators consensus projects gross domestic product (GDP) will rise at an annualized rate of 1.2% in the December quarter and 1.6% in the March quarter before accelerating to 2.8% by the December 2013 quarter.

GDP-growth forecasts have been declining since spring, weighed down by a slowdown in Asia, economic weakness in Europe, decelerating U.S. corporate profit growth, and concerns about political gridlock or increased regulation after the election.

With these issues still weighing and the fiscal cliff of automatic tax increases and spending cuts looming, few expect the economy to deliver robust growth in the year ahead. But GDP should continue rising, supporting the 4.2% increase in U.S. corporate profits in 2013 projected by the Blue Chip consensus.

Have the GDP targets fallen enough? That's the trillion-dollar question. Fortunately, Blue Chip aggregates the opinions of more than 50 forecasters, a sample size large enough to dilute most of the effect of individual biases. The 10 highest full-year 2013 growth forecasts average 2.4%, while the 10 lowest average 1.4%.

The consensus suggests most economists expect politicians to sort out the fiscal cliff no later than early next year, engineering a moderately soft landing, while conditions overseas sort themselves out gradually over the next year. Naturally, deviation from these outcomes could drive divergence from the forecast in either direction.


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