Why GDP Could Trump Unemployment in Importance This Week

What worries 24/7 Wall St. is that economists may still have projections for the second-quarter GDP report that are too ambitious. As of Monday, the consensus estimate from Bloomberg is 3.1% growth in the second quarter. Durable goods may have saved the report from sagging too far south just last week, but we still saw Goldman Sachs and Morgan Stanley trim their estimates.

There are other concerns about why we are looking for closer to 2.5% rather than 3% growth. First, it is not that we are projecting the number, but we are concerned that other economic readings are simply not supporting the seasonally adjusted growth trends that feel like a 3% or higher economy again.

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If you back out the consumer prices and inflationary components, the GDP price index gain is expected to be only 2.0%, if Bloomberg’s consensus reading is correct. Some of the cautionary flags would be as follows:

• The June Consumer Price Index showed higher inflation, which may artificially boost the number outside of that inflation index in GDP.
• The last reading on retail sales was not exactly the most GDP-friendly, and some 70% or so of GDP is measured under consumer spending.
• The Chicago Federal National Activity Index showed decelerating growth around the nation.
• Corporate earnings are still being driven by buybacks and cost cuts rather than due to systemic revenue growth in the domestic market.
• Capacity utilization remains stubbornly under the 80% mark.

Keep in mind that fourth-quarter GDP was up 2.6% on an annualized basis before the weak drop of 2.9% in the first quarter. The economy is recovering, but this rosy 3% plus growth expected by economists just feels as though it is too much when you see how little the underlying revenue growth is from major companies.

As of Monday, the July Employment Situation estimates from Bloomberg are as follows:

• Unemployment rate 6.1% vs. 6.1% in June
• Nonfarm payrolls 233,000 vs. 288,000 in June
• Private sector payrolls 233,000 vs. 262,000 in June
• Average hourly wages +0.2% vs. +0.2% in June
• Average workweek 34.5 hours vs. 34.5 hours in June

One though note on why we think GDP may be more important this week concerns how the global growth will look. The U.S. had such weak GDP in the first quarter that many 2014 targets were reduced. Since then, other global GDP reports have been trimmed as well. Unemployment is getting close enough to that 6.0% Fed benchmark that the difference here may now require handy surprises to create much more market moves in stocks and bonds.

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