Mixing signals

More than 25 government and industry reports on economic activity release in a typical week, and they often conflict.

For example, the Commerce Department said housing starts in December fell 4.1 percent. In the same week, the National Retail Federation said holiday sales rose 4.1 percent. And before these reports released, surveys of economists predicted what they would say. In fact, we often end up with a forecast telling us what the report will say, the report itself, and a survey on how we feel about the report.

So which ones really matter? The answer to that question could predict the outcome of the 2012 presidential race. President Obama focused on jobs reports in his State of the Union address in January. He cited reports suggesting he inherited a mess, and on his watch things got better. The next week House Speaker John Boehner cited his own statistics and said the election is "going to be a referendum on the president's policies regarding our economy."

So can economic data handicap the presidential race? IHS Global Insight says yes. Nigel Gault and Erik Johnson looked at past elections, ran the numbers through a complicated model and concluded that Obama will "likely" lose. IHS's equations say unemployment will have to fall to 7.5 percent and GDP growth will have to reach 3.9 percent to give Obama a victory. Neither result seems likely.

Gault and Johnson acknowledge that every election cycle is different. "Having seen the unemployment rate climb as high as 10.1 percent, voters may be more tolerant" of a higher rate than usual. "Voters may assign more weight to income growth and less weight to the unemployment rate than in past elections, opening the door for the president to win a second term."

The "real income" report comes out monthly from the Commerce Department, and the Jan. 30 report was good news for the president: personal income rose 0.5 percent for December, the best month in nearly a year.

Taking stock

The U.S. stock markets had one of the most volatile periods on record during August and September last year. Then, beginning in October, the Dow rose nearly 2,000 points.

But January was almost eerily calm as the Fed met and made news by being, well, clear. Fed pronouncements are notoriously obscure, but Chairman Ben Bernanke said plainly he expected interest rates to remain near zero until late 2014.

Will all this clarity and calm last? Likely not. Despite the run-up, many analysts believe U.S. stocks are undervalued based on current earnings. Birinyi Associates says U.S. companies are buying back their own shares at the fastest pace in four years. They certainly believe their own stocks are headed up.

But investors still see systemic risk. Individual stocks may look good, but investors don't trust the markets as a whole. The price of gold is a gauge of this fear. Between March 2009 and July 2011, gold doubled. It then drifted downward. But in late January it rebounded to July levels.

Europe remains the key threat to the global economy, with Spain joining Italy and Greece in the spotlight. Spain has 21.5 percent unemployment. Its central bank has called for sweeping labor market reforms. It said the country's economy will contract 1.5 percent this year, worse than earlier estimates but consistent with the rest of Europe. And Europe's contraction will cap U.S. expansion.

Spain, though, has a new center-right government that is implementing the sorts of reforms the central bank says the country needs. If Spain recovers, it could provide an alternative model for many of the left-leaning-and troubled-economies of Europe.