Pardon us if we gloat for a few moments.
Last summer, when the majority of Americans, and possibly the majority of the economists as well, considered the U.S. to be entering a double-dip recession, we were openly and publicly skeptical. As we have noted in the past, the U.S. economy is surprisingly durable and tough to bring down. In addition, while we had noted a slowing in most of our favorite economic statistics, all but one remained positive. The one that was negative, personal income, spent only one month slightly below zero.
Despite the U.S. debt downgrade and worries about Europe, the economy avoided recession and was in fact surprisingly strong in the third quarter. Recent statistics point to further strengthening in the U.S. economy despite signs of further weakening in Europe.
Job creation remained positive even when the economic outlook was in doubt. More recently, the number of jobs has been creeping up and reached the 200,000 level in December. This is still not what we would classify as robust, but it is certainly respectable. One risk to this cheery figure is that a significant number of the jobs were somewhat seasonal (retail and delivery services). The unemployment rate of 8.5% is certainly better than the 10% rate we saw in the aftermath of the recession.
Retail sales remain respectable too. Income growth is steady, but modest. Auto sales were considered to be strong at 12.8 million units in 2011. However, the selling rate hit 17 million a couple of times in the past. This comparison suggests how poor results were during the recession and how low expectations are.
The factory sector appears to be picking up as we begin the new year. U.S. industrial output rose strongly in December, although it remains 5% below the pre-recession peak. The Purchasing Managers' Index (PMI) continues to pick up, suggesting strength in the industrial economy. Interestingly, 25% of PMI responses indicated that their inventory levels were "too low," up from 19% the month before. This suggests that manufacturers were surprised by economic strength, and hadn't increased production perhaps because they questioned the durability of the economic rebound. This is considered good news from an economist's standpoint, because low inventories typically result in higher future production.
The international scene is mixed at best. China, Brazil, and many other emerging markets have been working to slow their economies down to avoid rapid inflation.
The biggest negative on the world scene, obviously, has been Europe. Europe is most likely in a recession now. The unemployment rate in the 17 countries using the euro was 10.3% in November. Retail sales also fell that month. Even Germany, perceived to be the strongest euro-zone country, experienced a 1% decline in gross domestic product in the fourth quarter. German retail sales were down each month of the quarter. If there's any silver lining in recent European announcements, it is encouraging to see that European government borrowing costs have started to decline despite credit downgrades for many European countries by Standard & Poor's.
U.S. stock prices were broadly flat last year despite double-digit profit growth. Price earnings ratios are low compared to their historical averages. Corporate earnings growth, reasonable valuations, and continued economic growth together form an investment case for U.S. stocks that could be described as encouraging, and perhaps even compelling. We try not to get too carried away both on the downside and the upside, but we think that investors should confidently stay the course.