INDICATOR: Revised Second Quarter GDP/Weekly Jobless Claims
KEY DATA: GDP: 2.5% (up from 1.7%)/Claims: 331,000 (down 6,000)
IN A NUTSHELL: “Improving exports shows how being a seller to the world rather than just a buyer can really help the economy.”
WHAT IT MEANS: Is being right a month late still being right? I had 2.5% in my June and July Blue Chip forecasts and yes that was what the new growth rate came out at. But enough for my patting myself on the back because this is old news that probably does little to change a whole lot of thinking. The biggest reason for the large upward revision in spring growth was that exports grew a lot faster than initially estimated while imports were not as strong. That created a major narrowing in the trade deficit from the first go ’round. Otherwise, the picture did not change a whole lot. Consumer spending remained moribund while business investment in equipment and intellectual property was soft. There was some additional inventory building but it is not clear if that was intentional or not. Fiscal austerity continues to restrain growth though the speed bump has been lowered. The government remains an impediment but it is weak corporate and household spending that is the real issue facing the economy. That is no different than what we saw in the initial estimates.
While the GDP numbers were nice to see but not unexpected, the continued trending down of jobless claims is the best news that households could get. When you look at the ratio of claims to labor force, we are nearing levels normally seen during strong job growth periods. This report points to a decline in the unemployment rate in August and hints at job gains well in excess of 200,000. That is where I am at for next week’s employment report.
MARKETS AND FED POLICY IMPLICATIONS: The decent second quarter growth pace may hide the underlying weakness in the economy but it does provide some additional cover for the Fed. I don’t believe the members are moving toward eventually easing back on QE because they think the economy is in good shape. I think there is a growing view that enough is enough and it is time, the economy notwithstanding, that for the markets to stand on their own. But timing does matter so anything that supports the view of those who want to move sooner rather than later has to be taken seriously. And since the jobless claims level is pointing to better payroll gains ahead, the possibility of a start in tapering as early as September has gone up. I don’t think it will happen then since fiscal policy will not be settled by the next meeting, which is September 17-18. The FOMC loses nothing by waiting at least until the October 29-30 meeting. I still have the December meeting as the start date in my forecasts. As for the markets, Syria overhangs everything and these numbers probably will not do a whole lot to anyone’s investment positions.