Recent economic data have been strong.  The strong data have helped alleviate concerns that European problems will pull the rug out from under the U.S. stock market.  Economic data are likely to provide continued stock market support in the months ahead.

Employment Data Trends Are Flat Out Strong

By far the most important economic trend is the undeniable and significant improvement in the U.S. labor market. 

The debate over whether the 8.3% unemployment rate is accurate is totally meaningless to serious economic or stock market analysis.  Even if unemployment should be counted at a higher percentage rate due to a different calculation of the labor force, that does not detract from the importance of the gains in the total number of people employed.

Nonfarm payrolls are rising at a significant and accelerating rate.  The January gain of 243,000 in nonfarm payrolls represents a bit less than a 0.2% monthly gain and a 2.2% annual rate of increase.  That isn't blowout levels, but it is strong and up from the average gain of 170,500 in payrolls in the prior four months.

Average hourly and weekly earnings also rose at about a 2% annual rate in January.  That means that, on an annualized basis, there were about 2% more people working, at an average salary of about 2% more.  That implies about a 4% growth rate in buying power.  That is above inflation, and enough to keep the economy growing at a solid pace.

Further gains in payrolls are likely.  The chart below shows the trend in claims for unemployment benefits.  Claims are a very strong indicator of future trends in payrolls.  The downtrend in weekly claims is very much a positive for the economic outlook.

It is interesting to note that the trend in new claims for unemployment has also frequently been a strong stock market indicator. 

Other January Economic Data

Other signs that January was a strong month for the economy include:

1. Strong January auto sales, up 5.2% from December to a 14.2 million annual rate.  This will give a strong boost to overall consumer spending for January.
2. The January ISM index rose to 54.1 from 53.1 in December.  This suggests manufacturing growth in February.
3. The January ISM services index rose to 56.8 in January from 53.0 in December.

Credit Trends

Credit trends also continued to improve in January. 

The weekly H.8 data on loans show that commercial and industrial loans have continued their uptrend of recent months (all data in billions of dollars, seasonally adjusted):

Now, there are early signs that real estate loans might also be turning around.

Not Getting Carried Away

These recent signs of economic strength don't signal a booming economy.  The housing sector remains weak, government spending is stagnant, and the outlook for exports is cloudy given global economic conditions. 

The recent data, however, do provide near-term optimistic signs that U.S. economic growth could be stronger than expected.  For stock investors, it is what happens on the margin that is important -- will the changes in upcoming information help or hurt my stock positions? 

Right now, it looks like economic trends will provide support for a stock market still deeply undervalued due to European risks.

Decoupling?

The first question on a TV panel the other day about the strong January payroll figures was: "does this show that Europe is not in a recession?"  The implication was that if Europe was in recession, the impact should be evident in the U.S.

The answer, of course, is "no."  Europe may very well enter recession, and European economies could be stagnant for a long time.  The implications for the U.S. economy, however, are not nearly as severe as widely feared.  The U.S. economy can post solid growth even while Europe stagnates.

The real risk for U.S. stocks is that a severe credit market problem develops in Europe that damages U.S. banks. 

The term "decoupling" has been commonly used lately because U.S. stock prices are not whipsawing on a daily basis on the latest rumor out of Europe.  The U.S .economy hasn't become any less decoupled from Europe.  It is just that the market has regained some sanity and recognizes that U.S. economic and profit growth can continue even with continued political turmoil in Europe. 

What It All Means

Stocks have had a great run in January.  In our opinion, this is more of a catch-up to underperformance last year (when profits rose 14% but the S&P was flat).  It is also boosted by seasonal trends.

Now, there is a risk that the momentum slows in the months ahead.  That wouldn't surprise us at all.

The recent strength in the economic data, however, provides comfort that any correction in stock prices is less likely to be affected by renewed double-dip recession talk.

Real GDP growth is unlikely to reach 4% or more, such as typically happens in a rebound after a recession. But the early signs from the January data are that economic growth will be sufficient to provide underlying support to stock prices and prevent any minor correction from turning into a sharp downturn.

The January economic data have been surprisingly strong and that reduces some of the risk in the near-term stock market outlook.

--Dick Green, Briefing.com