Economic Notes: A Snail’s Sprint
8/24/2010
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
This week’s data on housing sales (new and existing) and a revised estimate of Gross Domestic Product (GDP) for the second quarter (Q-2) will most likely document further deceleration of the recovery. And with each new release, concern about the likelihood of a “double-dip” (i.e., renewed economic contraction) will increase.
But the double-dip concerns, while not implausible, remain improbable.
An uneven rebound was expected (See: “Bottom Bumping”) and recent data are consistent with that outlook. As discussed below, the economic data are increasingly “noisy” and, therefore, the outlook seems increasingly murky.
This does not mean that a double-dip is inevitable. It appears more likely that the economy will continue to drift upward – like a sprinting snail – with small gains that are apparent only by watching closely – by looking at the detailed data.
The growth of GDP in Q-2 is likely to be cut in half (to 1.2%) because the trade deficit was larger and inventory gains smaller than initially estimated. Though certain to attract attention, the revision is ancient history, Q-2 ended in June.
A sneak-peek at GDP of the third quarter (Q-3) can be gleaned from the Chicago Federal Reserve Bank’s National Activity Index (NAI), a composite of 85 economic indicators. The NAI for July indicates that the economy continued to grow, but below its long-term trend. July’s pick-up in manufacturing output offset ambivalent employment-related indicators and negative numbers for housing construction.
On its face, the most recent report on applications for unemployment insurance (UI) benefits suggests that employment conditions are worsening. UI claims, a proxy for layoffs, have increased for three consecutive weeks to 500,000, a level unseen since last November.
It may be, however, that the UI data are sending a garbled message.
Like many economic indicators, the UI data are seasonally adjusted to smooth regularly recurring fluctuations (e.g., holiday closings of UI offices). Both the seasonally adjusted and unadjusted data are published, but the former tends to garner attention.
Seasonal adjustment is a useful tool, but even in the hands of a skilled artisan a good tool can slip the mark. For example, since seasonal adjustment relies on historic data to estimate recurrent patterns, it lags in capturing long-term shifts in their timing or size.
Alternatively, the tool may function optimally but its smoothing (i.e., averaging) may obscure non-seasonal changes – particularly where the adjustments are substantial. Each January, for example, the UI seasonal adjustment factors significantly shrink the claims count; while in August, they increase it substantially.
Indeed, in the most recent week, seasonally adjusted claims were one-quarter (about 100,000) more than actual filings and a 5.3% weekly decline in new applications was adjusted to an increase of 2.5%.
This does not question the validity of the adjusted data but does suggest caution in drawing inferences from it. Statistically, when the reported change (12,000) is less than one-eighth of the adjusted difference, there is a lot of room for alternative realities.
Year-on-year, UI claims continue to trend downward (12.3%, unadjusted, and 13.0%, seasonally adjusted) suggesting that the slow growth recovery continues to crawl along.
This week’s reports on home sales – both existing and new – were generally expected to be weak due to the expiration of the Federal homebuyer tax credit.
Existing home sales in July were one-third less than in April, according to the National Association of Realtors®. But since units under contract at the end of April remain eligible for tax credits through September, some additional impact can be anticipated in the coming months.
Homebuilding is also evidencing the end of the tax credit. Activity rose slightly (1.7%) in July, but the increase was entirely in multifamily (i.e., rental) construction.
Single-family starts fell for the third straight month and were down by almost one-fifth (19.6%) since the credit expired. Residential construction looks to remain sluggish as building permits slid for the fourth consecutive month.
Homebuilding is likely to continue bottom-bumping well into 2011. If so, it will not add to growth but neither will it trigger a broader downturn.
Instead, it appears more likely that the economy will continue to drift upward, with all of the excitement of a snail’s sprint.
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The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.
Patrick J. O’Keefe is director of economic research at J.H. Cohn LLP. He can be reached at pokeefe@jhcohn.com or 877-704-3500.