Investors May Thank Washington for Gridlock

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NEW YORK ( TheStreet) -- The markets have been fixated on the political standoff in Washington, D.C. Through Friday, the S&P 500 was down in nine of its last 12 sessions.

The uncertainty, especially over the debt ceiling and possible default, has made investors hesitant to make longer-term commitments with their investment funds. Nevertheless, the data from the private sector, especially of late, have been much stronger than earlier in the year.

Consider:

The manufacturing sector is hot. The Institute for Supply Management (ISM) manufacturing index was 56.2 in September, the highest in nearly 2.5 years. In the U.S., we are seeing a manufacturing renaissance as labor cost increases in China and much of Asia are running in excess of 10% annually.

As an example of what is going on in manufacturing, 9 of GM's 17 production plans are operating flat out on an around the clock (3 shift) schedule. In 2008, at the last auto peak, only 3 of the then 20 plants were operating at full capacity. In August, auto sales were 16.1 million units (SAAR - seasonally adjusted annual rate), a level not seen since before the financial crisis. Sales fell back in September to 15.3 million units (SAAR) but only because the Labor Day holiday was on Sept. 2 and some weekend sales were pulled into the August numbers. The average of the two months, 15.7 million units (SAAR) isn't anything to sneer at.

In the labor markets, employers are having a hard time finding qualified applicants. This is quite a different market than it was even two years ago. First-time filers for unemployment insurance are at levels not seen since 2007, and this particular economic series has a high inverse correlation with stock prices, i.e., when claims fall, stock prices rise.

Voluntary quits are also up significantly indicating that current employees are getting more confident that they can find new employment. Despite the secular downtrend in the labor force participation rate, a labor shortage is developing.

While suffering a setback due to higher mortgage rates this summer, the housing market still suffers from a lack of supply. This isn't surprising given that we have had only minimal new housing construction for the past half decade while population growth has continued. As a result, there has been a double-digit rise in home values over the past 12 months, which makes middle class homeowners more confident and more willing to spend and take on debt. We see this in the consumer sentiment surveys, in the growth of credit card debt and in new auto financings

The U.S. economy is mainly service based, so the ISM non-manufacturing index is an important indicator of economic health. In August, that index hit 62.2, the highest level since early 2011, a time when GDP was expanding faster than 3%. Not to get too excited, the index fell back to 55.1 in September. Nevertheless, that is still a healthy result. By definition, anything over 50.0 signals growth.