Not So Bad
I have been arguing all along that we will avoid a double dip recession. I must admit I have been concerned throughout the summer as the news became relentlessly poor. But I still maintain that, while GDP could be weak over the next few quarters, we are going to keep on growing. Not that it matters much if we don’t create jobs.
Today we have two reports that support my “weak growth” forecast:
New claims for unemployment assistance declined by 27,000 last week to 451,000. This was a larger drop than most analysts has expected so it generated a modest positive buzz around Wall Street. My take is that we should simply yawn. As I have said here before the entire summer of this data series has been messed up by the oddity of the seasonal adjustment. The big US auto makers kept a full complement of workers throughout the summer instead of furloughing as usual. That skewed the numbers because the government applies a seasonal factor based upon history before it releases the data. So just as the early summer figure was worse than the underlying raw data suggested the late summer data will be somewhat better. We have to wait another week or so before we can identify real trends.
What we can say unequivocally is that the numbers are way off where we need them to be. Setting aside the quirks of adjustments we know that any figure higher than 400,000 id simply not good enough. Clearly the job market is stuck in the doldrums and shows little sign of breaking out.
The other middling-to-good news was the monthly trade report which showed a much reduced deficit on the trade balance. If you recall the last GDP numbers were strongly reduced by a surge in imports that chopped a significant percentage off domestic growth. I reported at the time that the import surge looked to be a one time phenomenon and that the third quarter should benefit from a return to a more normal path. So the news that July’s deficit shrank by 14% to $42.8 billion is not a great surprise. Imports dropped by 2.1% to $196.1 billion, while exports jumped 1.8% to $153.3 billion, their highest level in a year.
What do we make of the trade figures?
There are three points to note:
First: the export number clearly reflects the worldwide economic revival earlier this year. Unfortunately, as the OECD just reported, that global recovery is starting to show signs of wear and is likely to fall away over the next few months. US exports will therefore drop slightly and may not be able to keep up July’s improvement.
Second: the export number included a strong set of order figures for the aircraft industry, Boeing in particular did well. These orders tend to be highly “chunky” and thus volatile. So we should look for a drop in the export figures next month simply due to that chunkiness.
Third: and this was my point last month, the import figure dropped due to the oddity of the surge in June when importers appeared to have re-stocked aggressively. Because of this surge, July was almost certain to be better than June under any circumstance.
Take these three factors together and we are forced to take a more moderate view for trade. While it’s nice to see a shift, we have to expect only modest improvements as the year goes on and not a continuance of July’s sharp change.
What this implies is that third quarter GDP will be lifted by the reduction in the trade deficit – just as the second quarter was depressed by it. This pick up in trade will offset some of the slowdowns we are expecting in other sectors and thus GDP could increase.
As I said at the beginning: this simply supports my forecast of weak growth. If everything holds up the way it is now – a big if I agree – then third quarter GDP will be positive and higher than the second quarter number of 1.6%. This leaves growth well below the threshold of around 2.5% at which level we usually see improvements in unemployment. In other words we will continue to recover from recession, and yet continue not to feel as if we are.
That’s not good. But it could be worse.
