As the summer draws to a close, the U.S. economy is continuing to improve across multiple dimensions and many of them will be on display in the week ahead.
- Manufacturing is improving which should be confirmed by increases in the Chicago Purchasing Managers Index on Monday and the national ISM survey due out on Tuesday. Indeed, Tuesday’s number could show the manufacturing sector growing for the first time since January of 2008.
- Housing is continuing to improve which should be indicated by an increase in the Pending Home Sales index due out on Tuesday, although the increase may not be as strong as the more than 3 index point jump seen last month.
- Auto sales, also due out on Tuesday, should have increased sharply in August reflecting the impact of the “Cash-for-Clunkers” scheme. Its worth noting, however, that just replacing the number of vehicles normally scrapped in the course of the year and finding vehicles for the growth in the driving-age population implies a trend sales rate of over 15 million units. Because of this, contrary to popular opinion, Cash for Clunkers should not have stolen too many sales from the future, and while sales will likely relapse in September, they should begin to grow again in the fourth quarter, and,
- The labor market should show further signs of stabilization on Friday, with the monthly job loss potentially falling below 200,000 for the first time in almost a year. However, even in a best-case scenario, the unemployment rate is likely to move up from the surprise drop to 9.4% last month. These forecasts, however, are nervous ones, as initial unemployment claims remain stubbornly high for a labor market which is suppose to be about to turn a corner.
The second quarter earnings season is behind us but analysts’ estimates for earnings for the rest of the year continue to move up sharply, presumably reflecting company-specific data. While rising earnings are a positive for the stock market, rising deficits should be a negative for the bond market. Last week’s very sobering mid-year review of the budget from the Office of Management and Budget projects a colossal $9 trillion in cumulative deficits over the next decade.
Overall, while there are many risks to the recovery, a growing economy and growing national debt still seem to favor overweighting stocks and underweighting bonds.
David Kelly is chief market strategist for J.P. Morgan Funds