Recession Fears Receding

Monday, October 10, 2011

With the economic calendar on the thin side on Monday, stocks will likely reflect the positive momentum from last week's favorable run of economic data. The Europeans also appear to be making the right noises, with German and French leaders committing over the weekend to announce a bank recapitalization plan before the end of October.

Relative to last week's busy economic schedule, we have few reports on the docket this week. Friday's Retail Sales report and Wednesday's Fed Minutes are the important ones. I would be looking for some momentum in the Retail Sales report given the recent positive showing on the chain-store sales front. In the Fed Minutes, discussions surrounding the launch of Operation Twist will be interesting and may provide clues for further easing measures.

But irrespective of further monetary actions, the tone of recent economic readings has been positive, easing fears of a double-dip recession. These include Friday's jobs report, the positive construction data, the better-than-expected chain-store and light vehicle sales reports, and the two ISM readings.

On the labor market front, not only did Friday's September non-farm payroll reading come ahead of expectations, but the prior two months' numbers were revised upwards, indicating that the situation may not have been as grim as initially feared. When looked at from the perspective of the need for bringing down the nation's huge numbers of unemployed, the Friday report was neither helpful nor encouraging. The report's value comes from its ability to help us assess the odds of a fresh recession for the U.S. economy.

Viewed from that perspective, the Friday jobs report -- as well as the other recent economic readings -- was very positive. In an absolute sense, all recent economic readings have been soft and weak. But relative to fears of a recession, they are pointing towards a non-recessionary outlook. Bottom line: the U.S. economy remains weak, but it does not appear to be double dipping.

Some early evidence of this non-recessionary tone of recent economic reports has started showing up in estimates for third quarter GDP growth rates. On Friday, Macroeconomic Advisors raised their estimate for third quarter GDP growth from 2% to 2.5%, citing the positive economic reports, particularly the construction data, retail sales and payrolls data. I would expect this trend in positive estimate revisions to gain pace in the coming days.

In corporate news, Superior Energy Services ( SPN - Snapshot Report ) is acquiring Complete Production Services ( ) in a cash-and-stock deal valued at $2.7 billion. We also have word from AT&T ( T - Analyst Report ) indicating very strong demand for Apple's ( AAPL - Analyst Report ) new iPhone 4S. And we get the unofficial kick-off to the third quarter reporting season on Tuesday as Alcoa ( AA - Analyst Report ) releases results after the market's close.

Sheraz Mian
Director of Research