The market spent most of last week waiting for Ben Bernanke's speech, mainly to see whether he'd implement an asset-friendly QE3 programme. Although initially disappointed by no QE3 announcement, the market took some solace in the fact that Dr. Bernanke promised to extend September's normal meeting by a day just to evaluate what further measures could be adopted by the Fed to help the economy along. He very carefully said he would do what he could to help but postponed any big new project, at least until he could see whether his no-interest-rate-increase pledge of three weeks ago produces the desired effect. While not new or unexpected, I am very pleased the Fed took a pass on knee-jerk reaction that could have produced QE3. I hope this will take more air out of the commodity bubble in the ensuing weeks. That should make the consumer a little happier in the months ahead.
Economic Data Relatively Tame
The widely expected second-quarter GDP revision was negative, reducing growth to just 1.0% from the previously announced 1.3%. Slower exports contributed to the revision as did a surprise slowing in inventory growth. The more important consumption and business spending portions of the report were revised upward. The footnotes also indicated that disposable income, after inflation, would be marked up to about 1.1% from 0.7% after just revising the data downward last month during the benchmark revisions. Durable goods orders also looked surprisingly strong overall, but certainly not in every category. Manufacturing isn't dead yet, at least according to this report and the industrial production report from two weeks ago. Housing prices also logged their second increase in as many months.
GDP Growth Stalled in the 1.5%-2.5% Range, Despite What the Statistics Say
The up-and-down revisions of the personal income report cited above combined with a lot of contradictory reports make the job of economist even harder. Some of the best employment numbers of 2011 now look like they came during the months of the worst economic conditions. Likewise, the Institute of Supply Management Reports on Manufacturing have been trending down since early in the year at just about the same time real manufacturing data and orders began improving (or at least held their own). And after a series of revisions, the economy looks like it bottomed in the March quarter and that both the June and September quarters showed marked improvement. These data seem to defy the consensus view that we had a reasonably strong spring and have just now entered a soft spot and that the economy is on the way down. Changing seasonal patterns, up-and-down inflation, high gas prices, and the Japanese tsunami have done major damage to the reliability of the short-term economic indicators that have been so valuable in the past. My guess is that we have been stuck in pretty narrow 1.5%-2.5% growth range over the last year that hasn't gotten much better or much worse despite what the statistics say.
Second-Quarter GDP Revised Downward as Expected
In the government's second cut at second-quarter GDP, growth was reduced to 1.0% from 1.3%, as widely expected. Revisions touched many categories and included both increases and decreases. As many assumed, the major culprit in the revision was previously announced changes in export data, which decreased GDP by 0.4. More shocking was that inventory growth slowed dramatically and the inventory adjustment slowed GDP by the same 0.4% that exports did. Inventories appear to be too low and are likely to bounce back in the future. It's highly unusual for inventories to be this negative a contributor so early in a recovery. On the plus side, consumption was revised up as was business spending. While a downwardly revised GDP number is never a positive, I am pleased the reduction was due mostly to inventories while consumption and business spending actually improved.
After all these revisions, it looks like we have upwardly trending GDP growth after a weak winter. Here is the trend over the last six quarters.
The bad news is that given the extreme decline we had this recession, all we have gotten is a lacklustre recovery, even if that trend is looking at least a little better. Growth of 2.5%-3% is generally considered normal growth for the U.S. economy. For what it's worth, I think third-quarter GDP growth will exceed the consensus expectation of 2% based on auto sales, business spending, and services growth all by themselves. However, exports and housing will be detractors in the third-quarter GDP calculation.
Verizon Strikers Cause a Jump in Unemployment Claims
Over the last few weeks, initial unemployment claims bumped up to 417,000 from 399,000, driven by striking Verizon (VZ) employees in New York applying for unemployment benefits. Most states categorically deny claims by strikers who were not locked out by employers, but New York does allow some workers to collect. Hence, about 21,000 Verizon workers have applied for benefits (out of 45,000 strikers). So excluding those strike-related claims, benefits have hovered around the 400,000 level for several weeks. Frankly, given the number of high-profile financial firms that have announced layoffs (including Bank of America (BAC) and UBS (UBS)), I am a bit surprised at how well-behaved this indicator has been.
The good news is that the Verizon workers recently agreed to go back to work despite their contract dispute with the company. That should bring claims back down to a more normal level. Unfortunately, Verizon employees were out on strike over the critical period when the data were gathered for the national employment report, due this week. This could put a 45,000-person damper on a report that was perhaps already looking a little soft.
The real problem with unemployment is not the number of layoffs, but the lack of new jobs and consequentially the length of unemployment. The odds of claims getting much better from here are minimal. The employment market and the economy can still improve without much of a change in claims. In 2006, one of the better years of the last recovery, claims averaged 312,000 per week. At the worst of the recession, March 2009, claims got as high as 678,000. At the current strike-adjusted level of 400,000 or so, we are much closer to a boom year performance than recessionary levels. It would take a jump in the four-week moving average above the 500,000 level to really alarm me.
