GDP, Claims Data Fuel Recession Debate

Jobless claims are up, but growth is revised upward, too. The two May reports don't settle the slowdown vs. recession argument

by BusinessWeek, Standard & Poor's, and Action Economics staff

Is the U.S. in the midst of an economic slowdown, or a full-blown recession? Two data reports released May 29 appeared to give fodder to debaters on both sides of the question. Releases on U.S. gross domestic product for the first quarter—revised higher—and initial jobless claims for the week ended May 24—showing a small increase—were largely in line with economists' expectations.

First-quarter real (inflation-adjusted) GDP growth was revised to 0.9%, from the 0.6% reported preliminarily, in line with the market consensus forecast. The upward revision was concentrated in foreign trade, where both exports and imports were revised lower, but exports less so than imports. Trade contributed 0.8 of a percentage point to growth. Inventories were revised downward, contributing only 0.2 of a percentage point, down from 0.8 in the advance.

Business fixed investment was also revised upward, to negative 0.2%, from negative 2.5% in the advance report. Consumer spending, the largest component in the GDP data, was unrevised at 1.0%. The revised figures showed real final sales with 0.7% growth in the first quarter despite soaring prices, vs. the prior 0.2% decline that had raised fears that ensuing revisions might pull the GDP headline figure into negative territory as well.

Economy Showing More Momentum

"The revised data for Q1 still show a similar mix of a big positive contribution from trade but a negative impact from residential construction, alongside a flat figure for business fixed investment and restraint in real consumption," says Action Economics.

"The upward revision to growth and especially to final sales…show more momentum in the economy, suggesting that Q2 GDP could also come in positive," says S&P Economics.

"Overall, the GDP report had a slightly healthier mix of growth, with more strength coming from final sales and less from inventory investment," wrote Lehman Brothers (LEH) economist Zach Pandl in a May 29 note. "With Q2 GDP now tracking well above zero (0.9% by our estimate), the report will likely intensify debate over whether the economy actually slid into recession in the first half of the year."

Claims Not Quite at Recession Figures

U.S. initial jobless claims rose 4,000 to 372,000 for the week ended May 24, about in line with the 370,000 expected by the market. The four-week moving average edged down to 370,500, from 373,000. Continuing claims jumped 36,000, to 3,104,000 in the week ended May 17.

"[T]he claims figures have oscillated in a narrow 365,000-to-374,000 range over the last four weeks that lies about 50,000 above levels in August of last year, but which are still lean relative to the 420,000 to 470,000 figures that would be expected in a recession," according to a posting on Action Economics' Web site.

But Bear Stearns (BSC) economist John Ryding appears to have a lower recessionary threshold for the claims data. Although jobless claims have yet to move decisively into recession territory, he notes, they continue to bounce around close to the 375,000 level that he believes is consistent with mildly recessionary conditions. Looking ahead to the May employment report, scheduled for release June 6, Ryding judges labor market indicators for May to be consistent with a decline in nonfarm payrolls of around 50,000 and a rise in the unemployment rate to 5.1%, from 5.0%.

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