Economic First Look: Keeping Tabs on Growth

 | Aug 20, 2011 | 9:00 AM EDT
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  • Chicago Fed National Activity Index, 8:30 a.m. (all times EDT)


  • New Home Sales, 10 a.m.


  • Durable Goods Orders, 8:30 a.m.
  • FHFA House Price Index, 10 a.m.
  • EIA Petroleum Status Report, 10:30 a.m.


  • Jobless Claims, 8:30 a.m.


  • GDP (second estimate, including corporate profits), 8:30 a.m.
  • Consumer Sentiment (University of Michigan), 9:55 a.m.
  • Fed Chairman Ben Bernanke speaks, 10 a.m.

I'd like to draw your attention to the Chicago Fed National Activity Index. It's hardly a top-tier indicator, and not intuitive to understand, but it's the closest thing to a monthly read on broad economic activity after the GDP report. Most indicators cover just one segment of the economy, but this measures a compilation of 85 monthly and quarterly data points distilled into a single number.

But this single number doesn't mean much if you don't know how to interpret it. A reading of zero indicates the economy is growing around trend, or its long-term potential. A negative reading means the economy is growing below potential, until it dips below the -0.7 read, which suggests contraction. If the three-month moving average drops below -0.7, we might be entering into a recession. Bear in mind this is not a forward-looking measure, it's a coincident indicator. Right now, that trend rate of growth is about 3%, and we are quite a bit away from that. The CFNAI three-month average for June printed -0.6. That is very weak, and the lowest since October 2009. In addition, the measure has been moving down: it was -0.31 in May, -0.2 in April and +0.12 in March.

Some of the weakness has been concentrated in the months following the Japan earthquake, with monthly prints (rather than the three-month moving average noted above) especially weak in April and May and improving in June. I will be watching Monday's release closely to see the July data, as that will be the first read for the third quarter.

Analysts expect second-quarter GDP numbers to be revised downwards, as the second estimate for GDP, to be released Friday, includes international trade, which wasn't in the first GDP estimate. That report showed a bigger-than-expected trade deficit, which subtracts from GDP. (There will be one more estimate of second-quarter GDP, calculated when more data are received.) I would not be surprised if we have growth even lower than the 1.3% previously reported, and many banks and brokerages are cutting their estimates for 2011 and 2012 GDP.

Just this week, Bloomberg reported that JPMorgan said that GDP will grow 1% in the fourth quarter, rather than the 2.5% previously forecast, and 0.5% in the first quarter of 2012, instead of 1.5%. Citigroup cut its 2011 growth forecast to 1.6% from 1.7% and lowered its projection for next year to 2.1% from 2.7%, according to a research note. Neal Soss, chief economist at Credit Suisse in New York, cut his 2012 GDP forecast to 2.1% from 3.1% last month. Similarly, Goldman Sachs cut its 2011 US GDP forecast to 1.7% from 1.8% and slashed its 2012 US GDP forecast to 2.1% from 3.0%. Goldman said, "We now see the unemployment rate edging up to 9.25% by the end of 2012, and see a one-in-three risk of renewed recession."

You get the idea. While the second-quarter GDP report is likely to be reduced from its first estimate, we can infer from the economists' views that growth is unlikely to pick up from where it is now to a trend rate of growth for the rest of this year and into the next. That corresponds with the Fed's commitment to holding interest rates low until at least 2013.

We need about 3% GDP growth just to keep the unemployment rate stable, and to account for population growth and productivity gains. We need 5% GDP growth for a full year to bring down unemployment by one percentage point. Thus, we can probably expect some jobs to be created, but not enough to keep up with population growth. So Goldman's forecast for a slightly rising unemployment rate from now until the end of 2012 is entirely consistent with these economic forecasts.

In the meantime, there's Durable Goods Orders to consider Wednesday. Remember, manufacturing is about 11% of the economy, and durable goods are just one part of that 11%. I would caution against reading into more capex spending as a positive -- it could be, of course, but it could also mean companies are using labor-saving equipment and software instead of hiring. When I look at the measure I most closely follow in this report, non-defense capital goods excluding aircraft, it's a double-edged sword. On one hand, one always wants to see companies invest in new equipment. On the other hand, a relentless focus on productivity gains at the expense of labor can come back to bite the economy (as I pointed out in my column, "Where Game Theory Loses").

After all, machines don't spend money, people do. What we need to see is not whether companies buy more machines, but whether they hire more workers.

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