Today’s Upbeat Macro Reports Probably Overstate Growth Prospects

This morning’s economic updates for the US paint an encouraging profile, but it may be a bit misleading. The Bureau of Economic Analysis revised second-quarter GDP up by a hefty degree, estimating that the nation’s output of goods and services increased 3.6% for the three months through September (seasonally adjusted annualized real rate). That’s substantially higher than the 2.8% gain in the advance estimate for Q3.

There’s also bullish macro news in today’s weekly report on initial jobless claims. But last week’s tally of new filings for unemployment benefits was probably pushed lower because of last week’s Thanksgiving holiday. Even so, when you consider the downward bias in new claims in the previous weeks, it’s still reasonable to assume that the labor market will continue to grow for the foreseeable future.
As for the caveat in today’s GDP report, most of the upwardly revised pace of growth is due to a higher rate of expansion for inventories than previously estimated. Indeed, the increase in inventories in Q3 reflects the biggest advance since the late-1990s. The burning question is whether the surge in the level of inventories will be matched by stronger demand? And in a related question: If we see more demand, will that lead to more hiring?
For some insight, the November ISM survey reports on the manufacturing and services sectors for November are an obvious place to look. At the moment, however, the outlook is mixed based on this pair.
The headline ISM Manufacturing Index jumped to its highest reading last month since early 2011. That’s a signal for thinking that this cyclically sensitive corner of the economy will continue to expand at a healthy rate. The employment and new orders benchmarks for manufacturing also delivered similarly strong performances in November.
It’s another story for the services sector, according to yesterday’s ISM release. The headline ISM Non-Manufacturing Index fell sharply in November. Although it’s still above the neutral 50 mark, it’s now at its lowest level since May. The declines in the employment and new orders benchmarks for services add to the concern that this piece of the US economy—by far the bigger source of economic activity vs. manufacturing—has stumbled in November with relatively slow growth.
The weak performance in services falls well short of a warning sign by virtue of the 50-plus readings and so it’s premature to read too much into one month’s set of numbers. Meantime, the fact that manufacturing looks considerably stronger (combined with the recent declines in jobless claims and the upbeat if questionable news on Q3 GDP) suggests that moderate growth is still a compelling economic forecast for the near term. That’s also the outlook based on the October data via the Chicago Fed National Activity Index and The Capital Spectator’s US Economic Profile.
There’s also reason to think that the housing recovery will roll on as well after several months of turbulence: new home sales surged 25% in October, according to yesterday’s report from the Census Bureau. That’s a sign that demand for real estate is still strong.
Today’s bullish numbers for GDP and jobless claims may not be as rosy as they appear at first glance. At the same time, a broader look at recent data still doesn’t offer much support for the pessimists who think that the economy’s slipping over to the dark side. On balance, an objective review of the macro and financial reports in hand suggest more of the same: moderate growth.