Financial markets remain fraught with tricky cross-currents, including the "headline risk" brought on by yet another European Union (EU) debt crisis summit this week.

However, if investors look past the headlines and focus on improving fundamentals, they would see increasing positive data on the US economy.

Recent favorable reports on US manufacturing, consumer sentiment and a decline in the unemployment rate may finally help restore some bullish faith in the economy:

Consumer confidence in November jumped by the most in eight years.

Manufacturing expanded at the fastest clip in five months.

And the unemployment rate dropped in November to its lowest level since 2009.¹

Perhaps the best news of all: At long last, we're witnessing constructive data from the troubled housing sector.

Job Growth: More Positive Than at First Glance

Last week's November employment report is a great example of how negative sentiment can distract investors from the positive fundamentals and cloud their perception.

The financial media couldn't wait to label the report a failure last Friday morning, since the "headline" number of new jobs was a bit below expectations. But take another look at the details and the report is clearly positive.

Private sector payroll growth is averaging 160,000 jobs over the past three months, and 2.9 million new private sector jobs have been created in less than two years …

The monthly employment report is volatile and is often revised, but last month revisions were a big plus as payrolls in September and October were revised higher by 72,000 …

The unemployment rate dropped to 8.6 percent from 9 percent the previous month — and was down sharply from 9.8 percent at this time last year — a two and a half year low.²

Private payrolls are growing by an average of 157,000 per month over the past year, according to the "establishment survey" of big businesses that the Bureau of Labor Statistics (BLS) polls monthly.³

What isn't as widely reported is that BLS also takes a monthly snapshot of US household employment conditions.

The household survey is where data for the official unemployment rate is gathered, among other statistics, and the good news is household employment has been consistently exceeding payroll job growth as captured in the establishment survey — and by a rather wide margin.

According to the household survey, employment has grown by 1.28 million since August alone — an average of 321,000 new jobs per month — and more than double the official payroll gains tallied from the establishment survey.⁴

Most likely this positive divergence is because the household survey picks up contract employment and small business hiring that is missed in the establishment survey, which focuses on large corporations.

Since small business hiring is a key driver of American job growth, it's quite possible that employment gains have been consistently underestimated ever since the recession ended. This is one positive catalyst for a US economy that is slowly improving, but this good news doesn't get much air time these days, because, like everything else, it is being overshadowed by the latest breaking news from the EU debt crisis.

Yet there is another positive catalyst getting little recognition: Housing is finally showing signs of improvement...

Housing Offers Hope Just in Time for the Holidays

It goes without saying that the credit-fueled housing bubble and bust was one of the root causes of the financial crisis, but at long last we're seeing a glimmer of hope for American homeowners.

In fact, multiple reports out last week paint a picture that improvement in housing is underway.

First, the latest data from the Federal Housing Finance Agency (see graph at right) shows nationwide home prices gained almost 1 percent in September, and while the home price index is still down year-over-year, it has shown solid improvement since this summer — and a big rebound from the lows in 2009.⁵

Second, low home prices and record-low mortgage interest rates finally appear to be triggering interest from home buyers. Pending homes sales, a measure of new contracts to purchase existing homes, jumped 10.4 percent in October. This indicates strong final sales activity to come in November and December, which is not typically strong from a seasonal perspective.⁶

Third, new single family home sales jumped 1.3 percent in October, and while home prices remain under pressure, slipping 0.5 percent last month, median prices turned positive over the same time last year — up 4 percent. The reason: The supply of unsold homes on the market has been steadily falling since mid-2010. While still a bit high historically, the inventory of new homes on the market fell to just 6.3 months in October. That's a big improvement from the peak level of 12.2 months supply in January 2009.⁷

While this improvement in housing is still modest at best, at least the majority of the data is moving in the right direction at long last. These developments have been enough to finally turn US construction spending positive on a year-over-year basis for the first time in two years.

Spending on new construction was up nearly 1 percent in October, led by a 3.4 percent gain in residential housing and construction investment has risen in six of the past seven months.⁸

In fact, the number of new households formed in the US increased by 1.44 million in the year ended March 2011. The number of new homes completed over the same period, however, was just 636,000 — when normally home construction exceeds the growth in households by about 300,000 per year.⁹

The message is clear; housing demand finally appears to be moving back into balance with supply, and home prices should continue to gradually recover.

Granted, building activity is still feeble, and that's a good thing to keep reducing the inventory of unsold homes on the market. But the point is that construction is growing again for the first time since the housing bust, and is now adding to economic growth again, instead of being a constant drag on quarterly GDP growth.

Although it may take several more years for housing to recover fully, American homeowners may finally be able to wake up from the long nightmare of the housing bust, which in turn should work wonders for consumer confidence.

Good investing,

Mike Burnick
Director of Client Communications
Banyan Partners, LLC

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¹ Bloomberg data, 12/5/11; Bureau of Labor Statistics, 12/2/11
² Bureau of Labor Statistics, 12/2/11
³ Ibid.
⁴ Ibid.
⁵ Federal Housing Finance Agency, 11/29/11
⁶ Econoday Simply Economics, 12/2/11
⁷ US Department of Housing and Urban Development, 11/28/11
⁸ Ibid.
⁹ Cumberland Advisors, 12/1/11