No one will be inspired by this morning’s update on initial jobless claims. Then again, the numbers won’t frighten investors either. And that, perhaps, is the point. New applications for jobless benefits aren’t necessarily encouraging, but they don’t they look especially portentous.
That, at least, is our take. But judge for yourself. For the week through August 4, initial claims rose slightly to 316,000 from 309,000 in the previous week, the Labor Department reported. In the context of recent history, 316,000 looks middling, as our chart below shows. True, the bias leans to the upside of late, if only slightly. The four-week moving average of jobless claims is 307,500, modestly below last week’s number.
Judging by the broader trend, the news for jobless claims is that there’s no news. And that, arguably, is good news.
Betting on the status quo is a popular choice these days among movers and shakers, including the mover-and-shaker-in-chief: Fed Chairman Ben Bernanke. The central bank on Tuesday continued to hold steady on interest rates, keeping Fed funds at 5.25%, the prevailing number since June 2006. What’s striking about the ongoing preference for doing nothing with the price of money is the fact that in recent weeks the calls for a rate cut have grown louder. Subprime mortgage anxiety has been the immediate catalyst for the thinking that the economy needs a fresh injection of liquidity to keep growth bubbling. But the Fed has resisted, a decision that’s gaining support among pundits, including today’s lead editorial in The Wall Street Journal:
“…Mr. Bernanke did the right thing on Tuesday and refused to pander to the many pleas to rescue credit markets by printing more money.”
The economy, in short, continues to bubble, despite the recent fears driven by the real estate sector. A recession will eventually arrive. The central bank, for all its powers, is run by mortals, not gods. For the immediate future, however, it’s folly to think the economy will contract. There’s ample support for the idea that GDP growth for all of 2007, once the final number is published, will look decent by recent standards.
The “catch” is that time will inexorably take a toll on growth. That’s the nature of business cycles: eventually, they plant the seeds of their own destruction. True, the Fed has learned how to minimize the cyclical risk. Volatility in GDP is a shadow of its former variance. Some ambitious types have even advanced the idea that central banks have assumed the talents to dispatch business cycles to the dustbin of history. We’re highly skeptical of the belief, although for the foreseeable future the inherent allure of that notion will continue to resonate with the bulls.
But financial sobriety is quickly restored if one remembers that ours is a world where the overwhelming majority of forecasts are dependent on the past, and that the past informs the future until it suddenly doesn’t. At some point tomorrow will offer a sharp break with yesterday. The reversal will, of course, look obvious in hindsight while remaining virtually invisible in the here and now. Only by overlooking that monster of a caveat can we say with confidence that the status quo looks likely to prevail. That and $2, as they say, gets you a cup of coffee. And that, dear readers, is why diversification is still your only friend today, tomorrow and forever and regardless of what tomorrow’s headlines proclaim.