The economic numbers due out this week will be important in narrowing estimates of current economic momentum.
The following is a weekly commentary written by David Kelly, chief market strategist at JPMorgan Funds.
It's like being stuck in rush-hour traffic on route to an important meeting. Intellectually, you know that traffic was always likely to be slow and you also know that, provided there is no accident or road-works ahead of you, you should make the meeting on time. But you still feel pretty uncomfortable about the pace of your progress.
American investors looking at the pace of the economic recovery may feel a similar discomfort. Recent numbers include a slight uptick in unemployment claims and slight downward revision to first-quarter GDP. Logically, it shouldn't be that big of a deal – the economy will likely continue to produce jobs, profits will likely continue to recover and economic growth will likely come in at roughly 3.5% for the second quarter. However, given the uncertainty being generated by the European debt crisis and the very cautious and sour mood of the American public, an economy growing at 4% or 5% in the second quarter would do a lot more to calm frayed nerves.
The economic numbers due out this week will be important in narrowing estimates of current economic momentum.
On the positive side, Pending Home Sales may have risen again in April as buyers rushed to beat the expiration of the home-buyer tax credit. In addition, Light Vehicle Sales could post a modest gain, if sales over the Memorial Day weekend make up for appears to have been an otherwise lackluster month. On the negative side, the ISM Manufacturing and Non-Manufacturing Indices could dip from recently high readings. In addition, Productivity Growth for the first quarter will likely be revised down from an initial very strong reading.
The tie-breaker will be jobs numbers both in Initial Unemployment Claims due out on Thursday and the May Employment Report due out on Friday. The claims data will be watched nervously to see if there is any sign of a renewed downward trend, following a surprising backup two weeks ago. The May employment report will be distorted by the addition of close to half a million temporary Census jobs. However, the crucial number will be private sector payroll growth and this may well be lower than last month's reading, based on higher frequency employment data.
Overall, this week's numbers should show a solid but not spectacular economic recovery. The question remains: Will a slow but steady recovery be enough to offset the pulses of financial turmoil and economic pessimism still emanating from the other side of the Atlantic? Without a clear answer to this question, investors may want to maintain a very balanced portfolio stance in the short run, despite valuation metrics which suggest a long-term overweight to stocks and underweight to Treasuries.
