Politicians will not sandbag a very promising recovery

Article Image Enough uncertainty has returned to push the good economic news aside for the moment and become the Grinch that stole Christmas for investors

The news could hardly be better for the economy and stock market – except for the 800-pound Gorilla stalking around the room threatening to wreck the whole scene.

I refer of course to the debacle that the fiscal cliff talks in Washington have suddenly become, just as there seemed to be give and take going on that would wind up with an agreement before year-end.

That outcome is certainly up in the air after House Speaker Boehner’s leave-taking from the bi-partisan talks to undertake a failed side-track attempt to pass a Plan B.

Perhaps I am too trusting, but I still can’t imagine politicians are so self-serving that they would deliberately sabotage the economy just as it is finally showing real recovery from the 2008 financial meltdown.

Positives continue to pile up impressively, supporting the prospects for the economic recovery, and for a typical favorable season stock market rally that will continue into next spring – if we can get past the stupidity of the fiscal cliff talks in Washington.

Among the impressive positives:

The once a decade changeover of leadership in China that was causing uncertainty has taken place and seems to be creating no problems. Recent economic reports out of China have also been encouraging, lessening worries that China’s economy is slowing into a hard landing.

The eurozone debt crisis has not been resolved, and European politicians seem to have lost their sense of urgency again once markets halted their plunges. But the crisis has pretty much moved out of the news and so out of sight for a while.

Meanwhile, the U.S. economic recovery not only appears to be back on track but the stumble it took in the summer seems not to have been as severe as previously reported.

Last week it was reported that the economy (GDP) grew at a 3.1% annualized rate in the third quarter rather than the last revision of 2.7%, and the originally reported 2.1%. It was reported that home prices rose again in October and are now 5.0% higher than a year ago. Existing home sales rose 5.9% in November, selling at the highest rate since November, 2009 (when there was a tax-credit incentive in place for first-time home-buyers). The closely watched Philadelphia Fed Business Index surged up from minus 10.7 in November all the way up to plus 8.1 in December, with big increases in both new orders and shipments.

On Friday it was reported that Durable Goods Orders jumped an impressive 0.7% in November, and the previously reported orders for October were revised to growth of 1.1% from the previously reported 0.4%. Consumer spending was up a big 0.6% in November to the highest level in three years, and consumer incomes were up an impressive 0.8%.

Of equal importance, the Chicago Fed’s National Activity Index, which is a compilation of 80 economic indicators, and which has a history of accuracy in identifying recessions, jumped from minus 0.64 in October to plus 0.10 in November. That removed a worry, since its level in October had it very close to readings that the Federal Reserve identifies as indicating a recession is underway.

These reports all indicate that the economy probably also increased its rate of growth in the fourth quarter. And it has the tailwind of another round of stimulus from the Federal Reserve just announced last week.

But then there are the politicians who don’t seem all that worried about sending the economy over a fiscal cliff.

However, because of the bad press created by the Plan B debacle I believe talks will now resume between leaders with even more urgency while Congress is in its Christmas recess, and that a bill will be presented and passed by the Senate that will be acceptable to the House, if not by year-end so soon after as to have the same effect.

There’s no doubt that enough uncertainty has returned to push the good economic news aside for the moment and become the Grinch that stole Christmas for investors.

But it should be only a temporary setback of confidence and not the end of the promising favorable season rally.


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