This is a day for incredibly lousy economic news. The US House failed to do its part to pass a debt ceiling increase, thus starting the serious phase of negotiations (given that finance bills must start in the House). But even worse are the GDP figures for this year, showing a terribly anemic 1.3% annualized growth in GDP for the last quarter and an incredible downward revision to the first quarter of just 0.4%. It would take unbelievable optimism to find something good in the news today.
Actually, the is something good. Initial unemployment claims have fallen to a seasonally adjusted 398k, continuing a rapid drop over the last month. What on earth can we make of that? Maybe a lot.
I’ll leave aside the debt ceiling “negotiations” after a few snide comments. It deserves mention because it appears that no matter what the cost of our borrowing is likely to increase north of $100B a year, or about $1,000 for every household in the US. Meanwhile, comparisons with the Lord of the Rings are flying. I think this is much more like the very similar “Ring” cycle by Richard Wagner – hours upon hours of screaming and posing followed by heaven and earth burning down.
But what really matters is the horrible Gross Domestic Product (GDP) figure that was released. Not only did last quarter fail to come anywhere near the generally assumed 1.9% annualized growth, the previous quarter was revised down sharply to a near contraction. This far below inflation and nowhere near the 3.3% or more that is needed to see a net increase in the number of jobs. We’re still in deep trouble.
Yet take a look at the 4-week average of initial claims, shown here from our good friends at the St Louis Fed since November. The most recent figures aren’t even on here yet, but the trends continue:
While the revised GDP figures tell us the story of what was happing back at the end of January, about 6 months ago, the 4-week Initial Claims data apparently reflects what was happening only 2 months earlier – the spike came at the beginning of April. This means that if the stock market is watching the GDP figures (and, after today, you can bet they are) you can get a jump on them by knowing what you are looking at.
More interestingly, the Initial Claims may well be falling to a level not seen since 2007 if they keep this up. The trend, right now, is extremely positive. It’s all a matter of Congress not screwing things up.
Whoops, sorry to bust that bubble of optimism for ya.
But it may be possible to collect GDP data in somewhat real time by watching Initial Claims data and assuming that it is 2 months old. That correlation is probably only very strong since about 2007, so this will take some fudge. But it looks like we may be able to catch these nasty revisions before anyone else does and get a stronger correlation between GDP growth and jobs growth.
Meanwhile, there is some faint optimism. Something has been going right over the last month or so and there is a good chance that the antics in Congress are going to screw it up bad. I’m not a huge believer in Keynsianism but I can be sure that draconian cuts right now without positive steps to reform and transform will not boost the optimism that is brewing. Those are the stakes playing out right now. Good night, and good luck.