U.S. Economy Up or Down?

One month ago there were simultaneous indications of an accelerating, and slowing, U.S. economy.  Yesterday and today we have a similar situation with an improving jobs situation and a tepid reading on gross domestic product (GDP).  The question: is the U.S. economy heading up or down?

First up, yesterday, the U.S. Department of Labor reported that weekly initial jobless claims fell by 24,000 to a level of 398,000.  While the four week moving average fell 8,500 to to 413,750.

Second up, this morning the U.S. Department of Commerce reported that gross domestic product (GDP) in the second quarter grew 1.3%, while first quarter growth was revised from up 1.9%, to up 0.4%.

Analysis:

Initial Jobless Claims

For the first time in many weeks initial jobless claims fell (barely) below the critical 400,000 level.  Jobless claims below that level can loosely be interpreted as meaning that the U.S. economy has added a net amount of jobs.

While this is a victory, it is a minor one.  The fact remains that U.S. businesses are not hiring.  And because of that, U.S. consumers are spending at flat levels – very few big purchases and only the necessities.

For the economy to get on a more robust footing businesses have to have growth opportunities that lead them to want to spend all of their accumulated cash.  Those growth opportunities will lead to job hires.

In the meantime, there just has to be more than one week of a positive jobs situation in order to get excited about it.

Gross Domestic Product

That first quarter GDP was revised so sharply downward is shocking…yes, really.  Basically it means that the U.S. economy just missed dipping into negative territory in the first quarter.  It also calls into question the quality of the second quarter GDP estimate.

If the first quarter number can be revised down by 1.5%, and second quarter GDP was just 1.3%, it suggests that the U.S. economy may have double dipped into recession.

I guess another way to look at would be that first quarter gross domestic product was 0.4% and second quarter GDP was 1.3%, so there might be an accelerating economy.  But frankly, all of the economic news lately has been anemic.

Importance grade: 10; these are the two grand daddy statistics of economics.  Right now both stats suggest fragility.

What To Do?

As I have written about many times before, mixed economic signals are an indication of an economy in transition; an economy at an inflection point.  But here we are not getting mixed signals about the economy, we are getting consistent signals of a sideways economy.

On the positive front, however, corporate profits for the second quarter have been consistently positive and, in some cases, strongly positive.  So there may be relief on the new job hiring front that would set into motion a virtuous circle.

But, in general, this inflection point makes it very difficult to handicap the future direction of the U.S. economy.  Why?  Because the economy is weak enough that major news events, like the Middle Eastern revolutions, the earthquake in Japan, the Greek debt crisis, and the U.S. debt crisis all have the ability to derail the national mood.  And some of these events, like the earthquake, just are not predictable.

So right now, it is difficult to have enthusiasm for the riskier asset classes, like equities.  However, that said, U.S. businesses are experiencing profit growth.  But if the U.S. debt crisis is not resolved soon it will be a drag on the economy, and the equity indices around the world are likely to fall.  So that would normally suggest investing in a safe haven.

But for gods sakes, can I really endorse investing in U.S. debt?  Debt that might see a default event in the next several weeks?  No.  What about cash?  Cash looks interesting (never thought I would say that).

But what looks very interesting to me, are equity investments in countries whose currencies are appreciating relative to the dollar, like Europe.

What also looks interesting to me is U.S. corporate debt.  Why?  U.S. corporate profits are up – so credit worthiness is up.  That might result in credit ratings upgrades and a resultant capital appreciation.  In the meantime, the yields are between 3-9% depending on the credit quality.  And those yields trump the returns that look likely to unfold from a U.S. suffering from an uncertain debt future.  So a mutual fund that invests in U.S. corporate debt is worth examining.

As I look back at the investment advice I have given on the blog over the last several months I have to apologize for the inconsistency of my recommendations.  I am not blameless.  It’s moments like this that make this former investment manager feel very human.

Jason