For financial markets that had been bracing for a scary double-dip recession, new economic data released on Thursday showing a plunge in jobless claims and above-1% GDP growth provided a reason to cheer.
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For economists who had been saying all along the U.S. economy isn’t likely to succumb to another economic contraction, the new indicators provided nothing more than welcomed confirmation.
“The market is pricing in recession and the economic data just don’t show any signs of that,” said Michelle Girard, senior economist at RBS Securities. “Actually, in report after report, none of the news looks particularly great, but none of them suggest the U.S. is slipping back into recession.”
For weeks Wall Street has been paralyzed by a host of fears, including the worsening sovereign debt crisis in Europe and the political circus in Washington over the debt ceiling.
However, recession fears did appear to ease a bit on Thursday in the wake of the release of the new indicators as the Dow Jones Industrial Average soared more than 200 points before retreating a bit later in the session.
In its third revision, the Commerce Department said gross domestic product increased 1.3% in the second quarter, up from 1% previously and well above the first quarter’s anemic 0.4% pace.
The boost can largely be chalked up to a revision to consumer spending growth to 0.7% from 0.4%. Also, the report showed more upbeat export growth and business spending.
Still, no one should really be thrilled with tepid growth of just 1.3% and that figure merely brings things back to where they were in the government’s first estimate. Also, the increase in consumer spending was still the weakest since the fourth quarter of 2009.
Meanwhile, bullish traders seized on the Labor Department’s weekly report, which revealed initial jobless claims plunged by 37,000 last week to 391,000 -- the lowest level since April. The report came as a shock as analysts had called for a drop of just 3,000 claims.
The bulls cheered the fact the closely-watched, yet volatile, figure once again broke below 400,000. The question is whether it will stay or once again creep above the key level.
Some waved off the steep drop in claims because a Labor Department official downplayed the report to Dow Jones Newswires, citing “technical issues and seasonal adjustment volatility” instead of economic factors.
However, some economists were dubious of that claim and said the explanation lacked enough information to discount the data altogether.
“I will tend to dismiss that,” said Michael Gapen, director of U.S. economic research at Barclays Capital. “Any time you have a seasonal adjustment process it’s going to have some quirks, but there wasn’t enough there to suggest to me the decline in claims was somehow not real. It’s not like the seasonal adjustment process turned a negative into a positive.”
Girard concurred with that, saying the technical issues argument “didn’t seem to hold a lot of water.”
So where does that leave the jobs market? With one week of tumbling jobless claims in an unstable indicator.
“The decline in claims is encouraging, but it’s just one week. We have to see if this is the start of a meaningful trend or just a sign of normal noise and volatility,” said Girard.
In another report released Thursday morning, the National Association of Realtors said pending home sales declined 1.2% in August, besting estimates for a deeper drop of 1.8%. Pending home sales also increased 7.7% year-over-year, but remain at a depressed state.
Economists said the reports, taken together, indicate the U.S. economy is not on track to contract, despite all of the gloom and doom talk and turbulence in the financial markets.
“A lot of people have been saying we’re in a recession. I think this data provides a little more comfort that even though the economy has slowed, we are still growing,” said Russell Price, senior economist at Ameriprise Financial. “I do not see the imbalances in the economy that will push us into negative territory.”
Greater clarity on the economy’s ability to withstand its current ills can be found next week as the first batch of important reports about September are slated to be released. These indicators include the closely-watched Institute for Supply Management’s manufacturing index, auto sales reports and the all-important government jobs report.
Some have suggested that just because the U.S. economy is flirting so dangerously close to “stall speed” that it will naturally sink back into a contraction.
Gapen called that notion “too simplistic.” He said, “There is a heightened period of uncertainty that leaves us vulnerable to a shock, but you really need a trigger to push the U.S. economy into a recession.”