Near-Term Economic Outlook and the Markets

The consensus view of the economic outlook is supportive of further gains in stocks and further upward pressure on Treasuries and the dollar through December.  In particular, consensus looks for above-trend 2+% Real GDP Growth in Q416, with evidence to be seen this coming week from an uptick in the November Mfg ISM and a modest speedup in November Payrolls.  While these expectations cannot be dismissed, there is some contrary evidence.   Also, some possible offsets in next week's reports could mitigate the impact on Treasuries and the dollar while sustaining gains in stocks.

Mfg ISM (due Thursday, December 1)
1.  Consensus is for an uptick to 52.1 from 51.9.   There is no obvious risk, but even a consensus-like print would be consistent with only modest economic growth.

2.  The regional surveys are mixed, with none having a solid relationship with the Mfg ISM.

3.  Seasonals favor an increase, but they did not provide the correct signal in October.

November Employment Report (due Friday, December 2)
1.  Consensus is for a speedup in Payrolls to +174k m/m from +161k in October.   But, the risk is for smaller increase, as hiring may have remained subdued ahead of the elections.

            a.  Continuing Claims point to a slowdown in November Payrolls.  Their second difference between Payroll Survey Weeks correctly predicted speedups/slowdowns in Payrolls in 6 of 10 months this year -- all correct predictions but one since April.  Weather effects could have interfered with the relationship in the first 3 months of the year.

2.  Consensus is for a steady 4.9% Unemployment Rate.  But, the risk is for an uptick, if an improved outlook draws in more people to the labor force.  An uptick would support a gradual pace of Fed tightening, as the increased capacity of the labor market would allow the economy to grow faster than trend without spurring inflation.

             a.  An improvement in the November Conference Board Consumer Confidence Index (expected by consensus), due Tuesday, would support this risk.   The Unemployment Rate moved in the same direction as the jobs component of this confidence survey in each of the past two months.

3.  Consensus is for +0.3% m/m Average Hourly Earnings, staying high even after the +0.4% in October.  The risk is for +0.1% m/m.

             a.  Calendar considerations suggest a 0.1% m/m print.

              b.  The last two times AHE rose 0.4% m/m, it was followed by 0.1% in the subsequent month.

Q4 Real GDP
1.  There is not enough evidence yet to have a confident estimate of Q4 GDP Growth.

2.   So far the evidence is mixed:  Stronger:  /1/ Motor Vehicle Output/Sales, /2/ Residential Construction, /3/ Business Equipment Spending.  Weaker:  /1/ Net Exports, /2/ Inventory Investment.

3.  The latest model estimates from the Fed are:  Atlanta: 3.6% (q/q, saar), NY: 2.5%.  But, the Atlanta Fed model was last updated on Wednesday (November 23) -- before the release of preliminary data for the October Trade Deficit and Wholesale/Retail Inventories on Friday (November 25).   These preliminary data were weak.  It is not clear whether the NY Fed model took them into account.