Two pieces of economic news out this morning driving the markets initially but there is a lot of “hopium” built into the excitement. While the markets definitely needed some positive news these are only one reporting period reports and are not indicative of the overall trend which is far more important.
Let’s start with GDP. Gross Domestic Product (GDP) came in this morning at an annualized rate of 1.3% for the 2nd quarter reporting period and is up from the 1st quarter report of 0.4%. While this is a little better than the expected number of 1.2% the real issue is that Gross Domestic Income declined by 0.2%. GDP growth in the second-quarter is statistically indistinguishable from a quarterly contraction. More importantly, year-to-year growth slowed in the second-quarter to 1.6% from 2.2% in the first-quarter. The boost in GDP came from an upward revision estimated for vacation spending. Only in the national income accounts (GDP, GDI, etc.) is that likely to happen alongside a downward revision in income.
If we revisit the slew of manufacturing indexes that have all been sliding into contraction territory over the last three months it is highly likely that we will see the 3rd quarter GDP come in at the same levels or lower. Our estimate is that GDP for the 3rd quarter will wind up back close to 1% versus the current level of 1.3%.
The real head scratcher this morning is the weekly jobless claims number which saw a dramatic plunge this week. While this number is very suspect, since each previous weeks number is revised up, the sharp drop in claims amidst the recent reports and surveys showing weakness in hiring trends is somewhat perplexing.
From the report: “In the week ending September 24, the advance figure for seasonally adjusted initial claims was 391,000, a decrease of 37,000 from the previous week’s revised figure of 428,000. The 4-week moving average was 417,000, a decrease of 5,250 from the previous week’s (upwardly) revised average of 422,250.”
While the report was good for a spike in S&P 500 futures this morning to help offset the beating from yesterday I have to remain very suspect as to the number. The BLS gave a couple of reasons for the drop in claims such as Hurricane Irene and labor departments behind on filing paperwork. I have to agree with TD Securities’ Eric Green who stated: “If its too good to believe, it probably is, and the BLS says as much”
In regards to both of these reports today we remind you that these are one periods numbers in a series of very weak reports. It will take several months of data to tell us whether things are really begin to recover as the trend of the data is the only thing that matters. Everything else remains a guess.
However, referring back to the litany of economic reports from the various Fed manufacturing regions, the Chicago Fed National Activity Report and a host of others it is highly likely we will see downward revisions to both of these numbers in the near future.