Some Economic Data Points To Consider

As any regular reader of mine is aware, I am bearish on the world and US economy. Bearish means that I think that the US economy is presently still growing at a 1.5-2% annual pace, where it will continue until stimulus is withdrawn. Stimulus is for me not monetary stimulus (which I consider to be very ineffective in the present situation) but fiscal stimulus.

At present, the fiscal deficit for the 2011-12 year for the US is estimated to be in the region of $1.3 trillion by the CBO, the same as the fiscal deficit for 2010-11. I have expressed in previous articles that I feel that the good weather and poor seasonal adjustments have led to the false belief that the US is headed to higher levels of growth than the 1.7% recorded for 2011. There is, in my opinion, only one bullish data point for the US economy which will change my present view if it continues and that is the increase in bank lending to companies and individuals as this may be the precursor to better data on the economy. All this having been said what are the data points that I feel investors need to be prepared for?

Weekly jobless claims will increase over the next 2 months, as seasonal factors unwind, to a weekly level around 380,000 where they will stabilize for the summer.

Monthly non-farm payrolls will reduce over the next 2 months to a regular monthly gain of 125,000 approximately and stay there. As I am sure you are aware this data set is extremely volatile but I would expect the mean figure to come to 125,00.

PMIs will moderate in both manufacturing and service sectors. Manufacturing will decline more sharply than service as the world economy is slowing. I do not believe that the US economy is slowing just stabilizing in the 1.5-2% growth area. I would expect the national manufacturing PMI to fall to 50ish over the next 6 months. The service sector PMI should fall to around 51ish over the same period. Both will hold above the recessionary level until it becomes clear what action the newly elected president and congress is going to take over the US fiscal deficit. Be aware, as the data deteriorates, it does not mean that the economy is going into recession. It just means that the incorrect seasonal factors are unwinding. However, any indications of the fiscal position for 2013 will in my opinion be crucial to the economy and the stock market.

US house prices will continue to decline throughout 2012 and will finish the year 5-7% below today's level. Housing starts will continue to grow throughout 2012 but a slow pace. This will be mildly supportive of US growth.

Consumer confidence has hit its peak for the year and will slowly fall to the lows seen in 2011 around 40 for the Conference Board Consumer Confidence measure.

The USD/EUR will fall to 1.25 over the next 4 months. The yen will continue to weaken throughout 2012 against the dollar. The US dollar will remain flat to bid throughout 2012.

Spanish 10 year yields will once again rise to above 7%. Italian 10 year yields will rise to above 6%. Both in 2012.

The UK economy will enter recession in the 2nd quarter of 2012 and stay in mild recession throughout 2012.

There will be another QE in the US of $800 billion in Agency mortgage backed securities in the next 4 months. I do not know enough about US politics to say if this will be delayed due to the US presidential election. That is the caveat to this data point.

There will be another eurozone liquidity scheme before the end of the summer. I am unsure of the exact type of scheme or the take up but it will be needed and provided.

China will act to stimulate it's economy with a succession of monetary easing measures. It will not introduce fiscal stimulus before the newly installed leadership takes over control in the Autumn.

The question then remains, if this is a reasonable set of assumptions, will the market be higher on liquidity injections or lower on fundamentals? Whichever it is, if the data points above are correct, volatility is about to return. With US earnings under pressure, I go for lower but I understand the liquidity counter argument - I just don't agree with it! Sell in May and go away looks good to me. I recently penned this article which explains my short term outlook, which has not changed. I think that all investors should consider the implications of weaker data and be prepared for it, so that they are not shocked into action that they later regret. After all, I am sure many of you will consider weaker data bullish for the stock market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.