Companies Finally Reporting Better Economic News

For many months, almost all of the positive signs about the economy were from high-level, macro indicators like unemployment claims and broad manufacturing indexes. Individual companies remained mum about any signs of recovery. This week, some of the firms Morningstar covers began to talk about the good news, finally providing the real world data that had been very conspicuously missing from my evidence chain regarding an improved economy.

The tidbits of good news this week come from companies across a wide range of industries including  Intel (INTC) in technology,  Tiffany's  in retailing,  Emerson  (EMR) in the industrial world and even a software company. Intel was first, as it raised its outlook and future guidance driven by strong Asian demand, new products,  Microsoft's (MSFT) widely anticipated new operating system and even more and lighter laptops. Tiffany's, in its quarterly conference call said that sales across the company were now falling at a slower rate and that some stores had actually seen increases. Our analyst on the stock, Kim Picciola, couldn't help but muse that a better stock and investment banking results might be part of the reason. Emerson, an industrial conglomerate indicated that orders were stabilizing and in some cases were showing modest increases.

Finally, a company that sells software to the auto insurance industry noted that the number of claims being filed with insurance companies was on the rise--which paradoxically is good news for the economy. First, the number of accidents correlates with miles driven that in turn correlates with economic activity. Also, in bad times, drivers are often more reluctant to file claims because then the insured must often come up with the deductible before the car can be repaired or replaced.

The macro data this week was very good too. Housing related data was strong and although the consumer continued to stumble, the trend is moving in the right direction. Next week brings a ton of monthly data, including my favorite, the ISM survey of purchasing managers, which should provide even more good news. The employment data is also due, though I am a little concerned that this month may not provide the huge improvement that we saw in July.

The really good macro economic news this week came from the housing industry as data on housing prices and new home sales were both better than expected. The Case-Shiller home price index showed an overall 1.4% increase for June, the index's second monthly improvement. Our housing analyst, Eric Landry, is optimistic that the index probably has two more months of good improvement almost baked in (based on the index's moving average methodology) before seasonal factors begin to weigh on this carefully watched index. I think continuing improvement in the index bodes well for an increase in consumer confidence, especially when combined with the recent stock market gains. New home sales also looked great--increasing 9.6% for July, marking the 4th straight increase. The index is now up more than 32% from its low. Inventories in the new home sector are beginning to look unsustainable low.

The national income and expenditure numbers and a revised GDP number were also out this week. The news here was just so-so, but at least the trend is right. Revised GDP continued to show a 1.0% decline in the June quarter, a huge improvement from 6.4% decline in the March quarter. The improvement came despite a decline in its largest component, consumer spending. I look forward to more improvements and more than a 3% gain in the September quarter as consumer spending turns positive and inventory reductions and residential construction cease to be large drags on the calculation. The consumer expenditures numbers were lackluster, showing a 0.2% gain entirely due to auto sales. However, I do like the positive trend that is building. Given that the Cash for Clunkers program fell mainly in August, an overall increase in consumer expenditures for August is probably a good bet.

Next weeks brings the monthly jobs report and the ISM purchasing managers' survey. I think some very positive economic trends are in place but I worry a bit about the jobs number and perhaps a bit more about the market's reaction. The numbers themselves jump around a lot and are nearly impossible to independently project. Even  ADP (ADP), a payroll processor with live data, doesn't always project the labor department data correctly. Many forecasters are just using trend line forecast based on last month's strongly improved jobs number. However last month's number was a strong positive surprise and I often find that these positive surprises are followed by a negative surprise the following month. In addition, weekly unemployment claims data showed both up and down weeks over the course of the month so it doesn't seem that the total employment number for the month will get much of a tail wind from reduced lay-offs. While I am very, very unsure of the actual number (it was -271,000 last month and consensus is around -240,000 for this month) I am positive that even a modest negative surprise would drive the market sharply downward.

On the other hand, the ISM purchasing managers' number has a good shot at getting above the magical 50% mark that means more than half of all companies have been seeing improvement in their key purchasing statistics. This has been one of my favorite indicators and it bottomed in December of 2008. It is a particularly good indicator at both bottoms and tops and leads the economy by several months.

Looking ahead further, I continue to expect a meaningfully stronger economy over the next three or four quarters. While I will stop short of calling it a V shaped recovery, I think the pattern will be closer to the V than the tepid, slow growth L shaped recovery that many are anticipating. And if we do get a double dip (a W), where things get better fast, and then fall back into a recession, I don't think the second dip is likely before the fall of 2010.

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