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Watch the economy, stupid

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by Peter Switzer

Being critical of the Prime Minister has become risky business lately, especially if you’re a man, so I will go respectfully soft in pondering her comments yesterday criticising those who talk down the economy. As an economics commentator, you have to tell it the way it is and yesterday we saw the trade deficit blow out to $2 billion, new homes hit the second-worst levels for 15 years and the services sector contract for the eighth month in a row!

It would be irresponsible and even stupid for me not to note that these numbers are not flash. But I’m optimistic that we can turn it around provided the RBA cuts again before Christmas.

Wall Street gains

While our economic news hasn’t been great, underlining why we needed a rate cut this week from the Reserve Bank (RBA), the Yanks are getting better than expected economic news, which could not come at a better time.

The USA needs good economic signs or else the Doomsday merchants will be right — QE3 won’t work and the end-result will be just more debt.

My argument has always been — and it works for Europe as well as for a business in trouble — you can’t pay back debts without an ability to earn income and that’s why economic growth is crucial.
The markets liked the overnight economic news with the Dow up 12.25 points to 13,494.61 while the S&P 500 index ended at 1450.99 — that’s up 5.24 points or 0.36 per cent.

Better economic news

So, what helped this result?

First, the Institute for Supply Management’s non-manufacturing index went to 55.1 in September, which was better than expected and any result above 50 represents an expansionary reading. The services sector is the country’s biggest employer and so this is a positive sign.

Next, the ADP jobs report, which looks at private sector employment, also beat expectations but this has not been a great indicator for the overall jobs report, which for September is out on Friday. The experts think official non-farm jobs will be up by 113,000 but if these are topped, there could be a real market spike.

Global concerns

Against these good news items I’m a little concerned about the oil price falling. Now some of it is related to rising oil supply, which really is a good thing as it drives down costs and helps lower production costs generally. However, some of the fall is linked to slower global economic growth with the USA and China disappointing.

Yesterday, China’s services sector data showed a slowing but it was still in expansion territory. China remains a bit of a concern as it’s turning out weaker economic readings, but I suspect the upcoming change of leadership will bring more stimulus and better economic results.

Buying opportunity?

I suspect current levels on stock markets will be tested in October but I see this as another chance to buy the stocks I like — great names that pay great dividends. The beauty of possibly being wrong is that I will see my current crop of shares go higher, which isn’t a bad thing about being wrong.

At the risk of being rude, but to steal and twist a Bill Clintonism — watch the Chinese and the US economies, stupid!

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Thursday, October 04, 2012

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