Thursday, July 31, 2008

July 31, 2008: GDP growth slow; Employment Costs unchanged; Unemployment Claims jump

1. Gross Domestic Product for Second Quarter (Q2 Advanced report)
Expectations: +2.3% growth
Previous (Q1): +1.0% growth
Revised (Q1): +0.9% growth
Today’s release (Q2): +1.9% growth

The report came in below what economists had expected, but nevertheless, markets improved. The Advanced estimate of GDP includes six components: Consumption of durable and nondurable goods, Investment (residential and nonresidential), Government spending, Exports, Imports, and Changes in inventories. Consumption, government spending, exports, and imports all added (were a positive contribution) to economic growth. Investment and changes in inventories subtracted from economic growth – inventories drew down growth a whopping -1.92%, its largest subtraction from growth since Q2 of 2005.

A closer look

Economists will be looking at the future reports of Q2 GDP when more data is available. Not all of the data are in; exports, imports, inventories, consumption, and government spending are all out for June, and in some cases, for May. I will be paying close attention to the exports, imports, and inventories numbers, as they will likely determine the direction of the revisions to Q2 GDP that are released on August 28.

A note on revisions

As I explained, GDP goes through a long revision process. In this release, all of the GDP numbers were revised downward since January 2005; specifically, growth for Q4 2007 was revised down to -0.17% (a contraction) from +0.6%. As I still believe we are skirting a recession, revisions to GDP may tell a different story later on. Certainly the labor market is suffering with 6 straight months of job contraction.

2. Employment Cost Index (Q2)
Expectations: +0.7%
Previous (Q1): +0.7% growth
Revised (Q1): unchanged
Today’s release (Q2): +0.7%

The Employment Cost Index (ECI) is a quarterly index that “measure of the change in the cost of labor, free from the influence of employment shifts among occupations and industries.” It is broken down into wage and salary growth, and benefit costs growth. This month, wage and salary growth slowed to 0.7% from 0.8% due to reduced bonuses and commissions in the financial and housing sectors stemming from the credit and housing crises that have enveloped the U.S. economy over the last year. Benefit costs were unchanged at +0.6%.

A closer look

Economists will pay close attention to future ECI reports. They will be looking at the Q3 and Q4 reports to see if recent inflation pressures (higher prices) are passing through to worker compensations (wages, salaries, and benefits). If wages start to rise, the Fed will have a 1970’s-style inflation problem. I expect that the slowdown in economic growth will keep inflation pressures in check for the ECI and the CPI (consumer price index, used to measure inflation).

A note on revisions

Revisions to this series are mostly based on seasonal factor adjustments (trying to smooth the series over the year), and have not been revised significantly since last year.

3. Initial Unemployment Claims (week ending July 26)
Expectations: 393,000 new claims filed
Previous (7/19): 404,000
Revised (7/19)): unchanged
Today’s release (7/26): 448,000

Unemployment claims jumped +44,000 today. That means 44,000 more workers lost their jobs and filed for unemployment insurance in the week of 7/26 than they did the week before. This is a weekly series, and one should look at a longer-term trend. The 4-moving average jumped also by 11,000 new claims filed.

A closer look

This is not a positive sign for the August payroll numbers. The payroll report (for August, will publish on September 5) shows the difference between jobs added and jobs subtracted (net job growth). The initial claims report only gives half of the story, job subtraction, but that side of the story is certainly problematic.

A note on revisions

This series is revised weekly, and usually revised upward. Claims reports for the week often come in after the weekly number is published. Those late reports are back-counted as an upward revision.

Please leave comments. Best, Nontruths

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