So far this week the market has digested a generally stronger than expected housing market, consumer confidence, and initial unemployment insurance claims, while simultaneously absorbing very weak durable goods and GDP figures. The inconsistency in the recent economic indicators begs the question: why? Well, first the numbers.
Initial claims came in at a seasonally adjusted 359K, a decrease of 6.8% over the prior week. The drop in claims was enough to move the four week moving average from 378.5K to 374K. The claims came in 20K less than what the average market analyst expected. The surprising initial claims figures didn’t materialize in the continuing claims numbers, with continuing claims coming in about in line with analysts’ expectations at 3.271 million, a decrease of 4K from the prior week. This week marks the third straight week in continuing claims improvement, with the prior two weeks coming in at a decrease of 28K and 29K.
In contrast to the temporary improvement in the initial and continuing claims figures are the recent GDP and durable goods data points. Each of these generally came in poor when compared to market expectations, with the durable goods inventories coming in at a growth of 0.6%. The increase by durable goods inventories was drown out by the other three components of the of the overall durable goods figure, with new orders, shipments, and unfilled orders coming in down 11%, 1%, and 3% respectively over the prior month. The decline in durable goods comes after a moderately good July, where all four components exhibited positive month over month growth (seasonal basis).
The advanced GDP figure also came in below analysts’ forecasts at a seasonally adjusted month over month growth of 1.3%. The above figure shows the relationship between the average weekly initial claims and the average change in the monthly GDP figure. The regression line between the two gives a general indication of where GDP should be assuming the historical relationship between initial claims and GDP were to hold.
What is the figure saying? It’s indicating that at the current level of initial claims, GDP growth should be about a percent higher. It’s probably not going to happen in 2012. The inability to get above the regression line is of lesser importance than the concern that we may move to the left of where we are now, meaning higher initial claims and very low to negative GDP growth. Basically, there’s little risk that we’ll see any significant improvement in initial claims above what has already been accomplished; rather, initial claims look much closer to be bottoming out.
In all, the recovery is accurately classified as a “sleazy recovery.” It is one that continues to be quite weak, with the initial and continuing claims figures probably more likely noise than any indication of near term improvement. Why a “sleazy recovery”? Well, because of all the dirty things that has materially weakened the long term competitive nature of the U.S. economy, such as unneeded cheap money, unhelpful fiscal stimulus, and many other dirty things? I’ll leave it up to you to figure out all the other dirty factors.