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Rise Up: US Soft Patch Appears to be Ending

October 17, 2012

As an analyst of the economy (and markets), I believe it's important to look for inflection points, not to wait until the "all's clear" bell is rung. Remember, the stock market is a leading indicator, while many of the most widely watched economic indicators are laggards (such as the unemployment rate). By definition, leading indicators will move first; the economy will follow; and lagging indicators will pick up the slack.
-Liz Ann Sonders, senior vice president, Charles Schwab & Co., Inc.

Key Points

  • By definition, inflection points are characterized by maximum weakness.
  • Many US economic readings are again suggesting notable signs of life.
  • Will the improvement be enough to offset the "fiscal cliff"?

 

One of the more interesting characteristics of the skepticism that has met the economic recovery over the past several years is the fact that it's overly focused on the absolute versus the relative. By that I mean when discussing an improvement in economic data, it's met with comments like, "yes, but we're nowhere near prior levels of growth." This phenomenon can be applied toward the economy overall, but also to segments, such as housing.

Inflection points versus absolute recoveries


As an analyst of the economy (and markets), I believe it's important to look for inflection points, not to wait until the "all's clear" bell is rung. Remember, the stock market is a leading indicator, while many of the most widely watched economic indicators are laggards (such as the unemployment rate). By definition, leading indicators will move first; the economy will follow; and lagging indicators will pick up the slack.


Also, by definition, inflection points (when moving from weakness to strength) occur at moments of maximum weakness in the data. It's at that point that I'm generally most intrigued … not after the recovery is in full swing.


Today's report is an attempt at inflection-point discovery. We recently experienced a third consecutive mid-year economic slowdown, all of which have had similar triggers. All three years' soft patches were partly triggered by the eurozone crisis, and politics figured into at least two (2011's debt ceiling debacle/Standard & Poor's downgrade of US debt and 2012's "fiscal cliff" concerns). This year's also had a heavy dose of concern about China's slowdown.


US leading economic indicators looking much better than global


In the three charts below, you can see the relative strength of the leading indicators for the United States compared to either the eurozone or China. Our growth is no great shakes, but we haven't suffered to the same degree.


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