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 Yes, GDP reports are always out of date, but that’s not a problem if the trend is fairly smooth and last month looks pretty much like this month and provides some fairly sturdy clues about next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.