Farcical figures

Serious Money: Equity investors' portfolios survived the usually testing trading days of early autumn. The "back-to- school" blues post-Labor Day were barely visible, while the 20th anniversary of the week the markets almost died in 1987 passed largely unnoticed in October, writes  Charlie Fell.

The best weeks for stock markets historically in performance terms are close at hand and the latest crop of economic numbers from the US have given bull market cheerleaders cause to celebrate.

The data suggests that the economic impact of the summer's travails has been muted, while the cavalry of US Federal Reserve chairman Ben Bernanke has delivered further monetary easing on cue.

Unfortunately, appearances can be deceptive.

Recently released data shows that the US economy expanded at a surprisingly vibrant pace of almost 4 per cent during the third quarter, but a casual examination of the composition reveals an altogether different picture as the areas of strength are unlikely to repeat.

Firstly, consumer spending proved robust but growth slowed to a crawl in September, while bottom-up figures from retailers suggest that the stagnation continues.

Secondly, the rate of increase in business investment slowed markedly and recent trends in corporate profitability point to further deceleration.

Thirdly, an unexpected increase in inventories boosted growth by almost half a percentage point. This can largely be traced to the car sector, which is unlikely to be building stock ahead of an expected surge in demand.

It should be clear that growth in the third quarter was exaggerated and unlikely to be sustained. For the sceptics who remain unconvinced, the gross domestic product (GDP) deflator underlying the supposedly strong numbers should put the matter to rest.

National income accounting, though correct, can sometimes lead to bizarre and unbelievable inflation numbers and the current estimate verges on the ludicrous. A sharp increase in import prices has seen the deflator drop below 1 per cent to the lowest reading since 1998; consequently, economic growth as reported in real prices seems healthy. The true growth rate hovers at about 2 per cent and is heading lower.

Recent GDP data painted a pretty picture, which seemed to be confirmed by the latest report on labour market conditions. The number of jobs added in October exceeded expectations by a wide margin but the strength reported is largely fictional.

The reason for this can be traced to the birth/death adjustment computed by the US Bureau of Labour Statistics, which attempts to account for the net new jobs created by small businesses that have not as yet reported to the bureau.

The estimate is decidedly lagging as it is based on data over the past five years and has accounted for more than 80 per cent of all the jobs created since the start of the year, as against 35 per cent in 2005. The adjustment added more than 100,000 construction jobs to payroll numbers in the past six months and boosted financial sector employment, with 25,000 job additions last month.

The numbers are not credible. Is there a serious economic commentator alive who believes that small building companies embarked on a hiring spree in the face of America's worst housing recession since the 1930s? Have financial start-ups really burst to the fore following recent credit and market woes?

Close examination says no. The idea that the American economy is back on track is farcical. Recent data offers little comfort under examination while the housing downturn continues to intensify.

The Institute of Supply Management's manufacturing survey for October registered its fourth consecutive monthly decline and shows that the sector is on the brink of a downturn, while consumer confidence dropped for the third consecutive month to its lowest level in two years.

Forensic analysis suggests that the economic expansion is close to an end but Wall Street is in denial.