November 29, 2012
Q3 GDP Revised Up, Jobless Claims Down
One up, one down. That's a good thing when it comes to the latest macro data points. GDP in the third quarter increased at a faster pace than initially reported and jobless claims continue to fall in the wake of the storm-related surge that drove new filings skyrocketing earlier in the month. The GDP news is a convincing sign that the economy continues to roll along in a slow-growth mode. The post-hurricane decline in jobless claims is also a positive, although the rate is a bit sluggish. What does it all mean? Let's take a closer look, starting with today's update on initial claims.
New filings for unemployment benefits dropped 23,000 last week to a seasonally adjusted 393,000. That's the second decline in as many weeks and another clue for thinking that the surge in claims for the week through November 10 was a one-time event that was driven by havoc unleashed by Hurricane Sandy. I said as much two weeks ago and the numbers published since offer support for this view.
That said, I remain a bit anxious because the rate of decline is modest relative to the surge. Last week's drop slowed to 23,000 vs. the previous week's decline of 35,000. And while new claims are again below the 400,000 mark, we're still well above the 360,000 range that prevailed before the storm hit. Another reason to wonder about the post-surge retreat is the modest rate of descent in the year-over-year unadjusted figures, as shown in the next chart.
An annual decline in jobless claims before seasonal adjustment is usually a strong signal that the labor market is creating new jobs on a net basis, which of course is critical for keeping the economy moving forward. The fact that new claims generally have been falling for the better part of the past two years speaks for itself. Accordingly, it's encouraging to see that claims are again falling relative to year-earlier levels. But today's update also shows that unadjusted claims dropped a light 4% vs. a year ago. Anything below zero is good, of course, but a 4% rate of decline is soft relative to pre-hurricane history and it's also quite a bit slower than the previous week's 8% annual decrease. Is this a warning sign of labor market troubles or just noise from the lingering effects of Sandy? Too early to say for sure, but suffice to say I'll be keeping a close eye on the incoming data in the weeks ahead and report the results here.
As for today's revised Q3 GDP, the 2.7% increase is quite a bit stronger than the previously reported 1.3%. The higher growth in the third quarter isn't a total surprise. Recall that The Capital Spectator's GDP nowcast, published right before the initial estimate from the government was released, anticipated a decent level of improvement over Q2's sluggish growth. I received a number of emails from folks at the time who said an improved outlook for Q3 vs. Q2 couldn't be right because the economy was weakening. But the nowcast said differently, drawing support from the relatively upbeat numbers via The Capital Spectator Economic Trend Index (CS-ETI) as of mid-October.
Meantime, Q4 growth currently looks set for a slower pace, as I noted in the latest GDP nowcast and CS-ETI updates from earlier this month. But for the moment, a broad review of the numbers continues to suggest that slow growth remains a convincing forecast for the near term. All the more so if the fiscal cliff issue is resolved, which may be a possibility if not a likelihood.
The economy is still vulnerable, of course, and a 2.7% pace for GDP is still modest at best. Overall, there's still plenty to worry about. But that's been the case all along. When there's a real danger sign that shows up in the numbers in a meaningful way, you'll read about it here. Meantime, as Societe Generale economist Brian Jones tells Bloomberg: “We’re just muddling through.”
Posted by jp at November 29, 2012 9:40 AM
Hey James, I am a new follower of your work, and I found you on Seeking Alpha. I just would like to point out, that 3rd quarter GDP got a lift from the first increase in government spending in 5 quarters, if I understand the data correctly. If this is true, I think this should have been mentioned to today's post, and what would the GDP growth have been, if we did not have the government increase in spending. Thanks.
Posted by: Tony Ferreira at November 29, 2012 1:59 PM