For the naive alien only just arrived on planet Earth, yesterday’s GDP report might be considered a great triumph. Indeed, taking the numbers at face value, there’s reason to celebrate. Real annualized GDP for the U.S. surged by 4.9% in the third quarter, according to the revision dispatched yesterday by the Bureau of Economic Analysis. That’s the fastest pace in four years by the standard of the past 20 years it looks sizzling. In short, the economy appears to be growing at a strong pace.
With that out of the way, we can now begin to address why the last statement may be irrelevant, or at least sufficiently misleading so as to require additional explanation. Let’s begin with the usual caveat that the GDP number is now and always a lagging figure. The third quarter might as well be the Jurassic Period for anxious investors in the here and now. Yes, GDP reports are always out of date, but that’s not a problem if the trend is fairly smooth and last month looks pretty much like this month and provides some fairly sturdy clues about next month.
Alas, the economy’s outlook these days is changing faster than a politician’s core beliefs. Suffice to say, there’s an excess of conflicting news out there. To take one example, consider the hot GDP number relative to the trend for initial jobless claims. While Q3 witnessed impressive growth, one has to wonder what Q4 will bring if the labor market is weakening, as the jobless claims data now suggest.
As our chart below shows, new filings for unemployment benefits have taken wing. Granted, it’s still within the range of recent history, but the trend doesn’t look encouraging. From mid-September through last week, jobless claims are up 40% and now reside at a nine-month high.
No wonder, then, that the Fed is now widely expected to cut interest rates again. Although Fed funds are currently at 4.50%, down from 5.25% a few months back, the dismal scientists tell us that it’ll take more cuts to head off the mounting economic weakness that appears to be taking root.
Ultimately, the primary support that’s kept the economy bubbling through thick and thin in the 21st century is consumer spending. As long as the labor market was reasonably robust, Joe Sixpack has been happy to spend, aided and abetted by a central bank willing and able to maintain easy credit. If the labor market is in fact weakening, consumer spending may face its biggest test in years and it’s not clear that a fresh round of rate cuts will save the day once more.
“When you look at consumer confidence and jobs measures you have to think that whatever you thought of in terms of consumer spending has to be given a haircut,” John Silvia, chief economist at Wachovia, told Bloomberg News yesterday. “That jump in jobless claims isn’t good news.”
This morning’s news on personal income and spending only lends additional support to the view that the slowdown has legs and is starting to have consequences for the man on the street. Higher energy prices, falling home prices and a number of other headwinds have conspired to trim consumer spending in October, the government reported today. Although personal consumption advanced by 0.2% last month, the pace was down from 0.4% in September. In fact, after adjusting for inflation, consumer spending was flat in November.
But, wait: there’s more–or less, actually. Disposable personal income rose only 0.1% last month, a sharp slowdown from September’s 0.4% rise. Once again, adjusting for inflation darkens the trend: real disposable income dropped 0.1% in October, the first decline since April.
So, yes, it’s good news that the economy was bubbling in the summer. The question is, how hot will it be next July?