Economic Surprises - The Wrong Kind
I am usually not one to say "I Told You So" but today I can say - "I Told You So". While analysts have been tripping over themselves as of late to correct their overly optimistic assumptions about the economy from near 4% growth to 3% growth - we have been writing about the weakening underpinnings of the macroeconomic environment for some time now. Today's report of the revision of the first quarter GDP (Gross Domestic Product) was, of course, "unexpected" by the mainstream media as it came in at 1.8% versus expectations of 2-2.2%. I know - it's a "shocker" that the analysts and economists got it wrong, again.
I am sure you are also "surprised" to find out the Jobless Claims were higher than expected as well. The game continues with the BLS (can we just take the "L" out now) as they under report the facts and then go back and change the data when no one is looking. Last week's jobless claims were revised up from 409,000 to 414,000 just as they release the fact this weeks, most likely an under reported number, jobless claims jumped by 10,000. However, what really WAS surprising was this line in the report: "Applications are above the 375,000 level that is consistent with sustainable job growth." Really?!? 375,000 has NEVER been associated with sustainable job growth. Historically, if you start pushing over 300,000 jobless claims you are starting to talk about real economic weakness. However, since jobless claims are near the peak of the 2002 recession it is no wonder the media wants you to look the other way.
I have overlaid a chart of the S&P 500 (inverted so you can better see the correlation) over jobless claims. As you can see, when jobless claims are rising the market doesn't fair very well. In the previous two recessions the market has peaked when claims began exceeding 300,000 claims a month. With jobless claims hovering at 400,000 and potentially turning back up, Ricoh just announced plans to lay off 10,000 workers, it is very likely that the market may have seen its near term peak.
Watch the economic data closely. All levels of manufacturing data has turned negative at the same time that analysts are ratcheting up earnings expectations based on corporate guidance. This generally proves to be very dangerous at turning points in the economy which negatively impacts profit margins, earnings and stock prices.
These assumptions are absent, of course, of QE 3 which we still believe will be appearing at a theater near you no later than the end of the dog days of summer.