Do you feel the recovery? The markets did on Thursday as word that the economy grew by 3.5% in the third quarter led to a 200-point rally in the Dow Jones Industrial Average Index.
However those gains were lost and then some on Friday as the Dow dropped 225 points. And it could have been more than simple buy the rumor sell the fact activity.
The Bureau of Economic Analysis released the advance first quarter Gross Domestic Product (GDP) report this morning, which showed a contraction in GDP of 6.1%. That is considerably worse than the expected decline of somewhere between 4.7% and 5.1%.
This was the worst performance by the economy in consecutive quarters in more than 50 years. Despite this the market rallied as numerous economists saw positive signs in the news. They referred to declining inventories and an increase in personal consumption expenditures of 2.2% in the first quarter as signs of hope. How that latter figure coincides with the 7.8% drop in purchases by U.S. residents of goods and services for the same period is unclear but suffice it to say, this was a bad number. See for yourself.
It wasn’t a good year for Freddie Mac and one could rightfully challenge its accounting methods based on the problems it has encountered in the last year but the Office of the Chief Economist at Freddie Mac released its 2009 Economic and Housing Market Outlook recently and their forecasts deserve a look.
While the outlook calls for the U.S. to officially pull out of the recession in the third quarter of 2009, it also predicts unemployment to continue to rise peaking at 8.7% in the fourth quarter and remaining above current levels through 2010.
Who knew all the market needed was a sharp increase in unemployment to get going. The Dow Jones and S&P 500 indexes both ended the day in positive territory despite the unexpected jump in the unemployment rate to 6.1% from 5.7%.
But all is not rosy. The liberal advocacy group Campaign for America’s Future put out a release Friday noting that “the misery index” has risen to 11.7%, it highest level since 1991. You may recall that the index came into vogue during the 1970s and 1980s political campaigns. The index is a composite of the unemployment rate and inflation using the annual Consumer Price Index.
The press release got us thinking. We have chronicled in this space recently how the various methodologies to calculate economic reports by the Federal government have been altered to produce more positive numbers. In the July issue of Futures, we interviewed economist John Williams who keeps up the government’s economic statistics using the original methodology at his firm Shadow Government Statistics (SGS).
Remember last month when the unemployment rate shot up to 5.7% from 5.1%? Well, in August, things continued to deteriorate in the jobs scene. Unemployment increased to 6.1% and nonfarm payrolls decreased by 84,000, with concentrated losses in manufacturing and employment services, interestingly enough. In the past 12 months, according to the Labor Department, the number of unemployed has increased by 2.2 million and the unemployment rate has risen by 1.4% in the past year.
Suspicion of government economic reports is at an all time high and given our government’s propensity towards happy news, and that we are in the midst of a political convention, traders must be looking at tomorrow’s unemployment report with a certain amount of trepidation.
That we are going into the number on the heels of a 344 point drop in the Dow Jones Industrial Average makes things more interesting. Did someone know something?
Initial unemployment claims for the week ending Aug. 30 jumped to 444,000, well above consensus estimates, contributed to negative sentiment. But tomorrow is the big one and given today’s move, a slightly better than expected report could cause quite a rally. As someone who followed these reports very closely, I can say that it is not that unusual for the unemployment report to come out completely counter to what initial claims showed. So it would not be proof of some conspiracy if tomorrow’s report is positive.
We have commented here recently about the folly being perpetrated in some of the governmental reporting of statistics. The distortions have grown so obvious that the Consumer Price Index (CPI) for April reported a drop in the cost of energy based on seasonal adjustments. Add that to the continuing outrage of relying on the core number, which excludes food and energy.
While all of the major reports’ numbers can be challenged, the CPI is perhaps the worst offender as that number is used to adjust Gross Domestic Product and is the basis for cost of living adjustments in social security payments and often in private sector salary increases.
