Economy Brightening in 2012 Initial Data From U.S. Belying Grim Investors

The U.S. is starting the year on a positive note, a sign that investors may be too gloomy.

Payrolls rose 200,000 in December, double the gain in November. A weekly measure of consumer confidence ended 2011 at a five-month high. And manufacturers reported their business in December grew at the fastest pace in six months. The combination indicates the world’s largest economy has enough staying power to withstand a recession in Europe and a slowdown in China.

“Markets are absolutely preoccupied about the risks from Europe and the U.S. housing market,” said John Herrmann, senior fixed-income strategist at State Street Global Markets in Boston, and the second most-accurate U.S. economic forecaster based on data from the last two years compiled by Bloomberg. “Yet we’re finding the economy continues to hold together fairly resiliently. We’re getting a good handoff from the fourth quarter.”

Bob Doll, chief equity strategist at BlackRock Inc., the world’s biggest asset manager, sees U.S. stock prices rising and yields on Treasury securities climbing this year as investor concerns about the outlook abate.

“We don’t need Europe to solve all its problems in 2012,” he said in a note yesterday to clients. “Since there is already such a significant ‘crisis premium’ baked into the markets, just avoiding disaster could be enough.”

He forecasts that U.S. stocks will return at least 10 percent in 2012, beating foreign markets for a third year, as the nation’s gross domestic product expands by as much as 2.5 percent. GDP grew 1.8 percent last year, according to the median forecast of economists surveyed by Bloomberg News last month.

‘Unacceptably High’

Stocks and Treasury yields fell after William C. Dudley, president of the Federal Reserve Bank of New York, said the outlook for unemployment remains “unacceptably high,” even though the jobless rate dropped to 8.5 percent (USURTOT), an almost three- year low. The Standard & Poor’s 500 Index fell 0.5 percent to 1,275.28 at 10:10 a.m. in New York. The yield on the 10-year Treasury note fell to 1.96 percent from 2 percent.

At the close yesterday, the index was valued at 13.5 times profits, about four points below the average price-to-earnings ratio since 1980, according to data compiled by Bloomberg.

Investors last year favored bonds over stocks, as they sought refuge from the financial turmoil in Europe. U.S. Treasury securities returned 9.8 percent in 2011, their best annual performance since a 14 percent gain in 2008, Bank of America Merrill Lynch index data show. Investors bought the U.S. securities as a haven, with Europe’s debt crisis threatening to infect the region’s larger economies.

Damage to Economy

The damage to the U.S. economy from the euro-zone crisis has so far been smaller than forecast, Dominic Wilson, chief market economist for New York-based Goldman Sachs Group Inc., said in a Jan. 4 report. Even so, he cautioned that it’s too soon to sound the “all clear.”

German factory orders dropped the most in almost three years in November, as the euro-region economy edged toward a recession and global demand weakened. Orders, adjusted for seasonal swings and inflation, slipped 4.8 percent from October, when they surged a revised 5 percent, the Economy Ministry in Berlin said in a statement today.

In the U.S., export orders rose in December to the highest level in three months, according to manufacturer reports compiled by the Institute for Supply Management in Tempe, Arizona. Production and overall orders were the best since April.

U.S. steel production reached 2.64 million metric tons in November, 19 percent more than a year earlier, according to the latest data from the Brussels-based World Steel Association. That’s the highest single-month output since September 2008, data compiled by Bloomberg show.

Low Steel Inventories

Steel inventories have remained low, “which suggests a realistic chance of an ongoing U.S. real and apparent demand-led recovery in 2012,” Credit Suisse Group AG analysts led by London-based Michael Shillaker wrote in a Jan. 5 report.

The price of North American hot-rolled coil steel, an industry benchmark, has advanced 9.4 percent to $700 a ton since the final week of November, according to Steel Business Briefing. That compares with a 2 percent decline in European import prices to 485 euros ($618) a ton.

U.S. Steel Corp. (X), the largest U.S. producer, will report net income of $367.5 million this year, compared with $24.7 million in 2011, according to the median of nine analyst estimates compiled by Bloomberg. Shares of the Pittsburgh-based company fell 55 percent last year, the worst performance since 2008. They will advance 10 percent to $31.39 in the next 12 months, based on the average of 14 analyst estimates.

Improving Car Sales

Stepped-up consumption of steel is driven partly by improving car sales. Demand at Ford Motor Co. (F), General Motors Co. (GM) and Chrysler Group LLC exceeded analysts’ forecasts in December, according to data released Jan. 4. Ford’s U.S. sales climbed 10 percent from a year earlier, while purchases were up 37 percent for Chrysler and 4.5 percent for GM.

The increase is paced by improving employment, Don Johnson, GM vice president for U.S. sales, said on a conference call with analysts. “Consumers are more confident and other underpinnings of our economy are either stable or slowly improving,” he said on Jan. 4.

The Bloomberg Consumer Comfort Index climbed (COMFCOMF) to minus 44.8 in the week ended Dec. 31, the best reading since mid-July, from minus 47.5 the prior week.

Applications for jobless benefits decreased by 15,000 last week to 372,000, according to Labor Department figures. Over the past four weeks the average number of jobless claims dropped to the lowest level since June 2008.

Adding Workers

Companies added 1.64 million employees in 2011, the best year for the American worker since 2006, after a 940,000 increase in 2010. Even with the gains, little headway has been made in recovering the 8.75 million jobs lost as a result of the recession that ended in June 2009.

Employment will pick up this year, as the economy strengthens and productivity growth wanes, said Joseph LaVorgna, chief U.S. economist for Deutsche Bank Securities in New York. He forecasts that payrolls will rise 2.6 million.

The U.S. probably expanded at a 3.6 percent rate during the fourth quarter, according to Macroeconomic Advisers. That would be the fastest since the second quarter of 2010 and double the third quarter’s 1.8 percent. The St. Louis-based forecasting company sees growth slowing to 2 percent in the current quarter as a recession in the euro area begins to take a bigger toll on the U.S.

“The tide is beginning to come back in,” James Glassman, senior economist at JP Morgan Chase & Co. in New York, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “We’ve got a long way to go. This is all positive, though, that we’re actually moving forward, and that’s an important trend.”

To contact the reporters on this story: Sho Chandra in Washington at schandra1@bloomberg.net; Richard Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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