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Economy paints Fed into a corner
Last week, economic data stopped a promising rally dead in its tracks. But the big story isnt disappointment over GDP figures. Instead, look at the pressure the slowdown is putting on the Fed.
By Jim Jubak
The top-line numbers were certainly scary enough to send the market tumbling.
First, there was the extremely disappointing 1.1% annual growth pace in the gross domestic product in the June quarter. The stock market had been hoping for at least 2% growth and maybe as much as 2.5%.
Second, the revised numbers for the first quarter of 2002 cut the stunning 6.1% growth of that period down to 5%. Strong, but weaker than wed thought.
And third, more revisions -- this time for all of 2001 -- showed that instead of a quick one-quarter recession in the third quarter, the economy actually dipped into negative territory in the first quarter of 2001 and stayed there for three quarters. The worst of the recession came in the June quarter of last year, when the economy shrank by 1.6%.
But whats the bottom line?
Three strikes and the economys out, right?
Well, not really. Weve learned never to stop with the top line when we read a corporate earnings report. The same thing goes for the economic numbers from Washington.
Lets start with that disappointing 1.1% growth for the second quarter. This number is really something called the advance GDP estimate. Its based on what the Commerce Departments Bureau of Economic Analysis (BEA), which produces the numbers, calls an incomplete survey of the economy. Key figures, like final import and export tallies, are missing.
A much more accurate number for the second quarter, called the preliminary GDP estimate, is due on Aug. 29.
Just how much more accurate? Well, the BEA says that two-thirds of the time, the revisions are off by 0.6 percentage points or less on the downside or up to 0.9 percentage points on the upside.
In other words that disappointing 1.1% headline could easily be an even more disappointing 0.5% or a consensus-matching 2%. And at this point, investors simply dont know which.
A routine reexamination of old news
The headlines about the first quarter of 2002 and the first three quarters of 2001 is also more ambiguous than it seems. These numbers are part of an annual benchmark revision that takes place each July.
So, while the spate of revisions may seem alarming, it is absolutely business as usual. This margin of error makes it really tough to find a trend in the short-term numbers.
If the second-quarter numbers are trimmed to 0.8% at the end of August, for example, and the advance GDP numbers for the third quarter come in at 1.2%, that would seem to signal a recovery right?
Not really.
Keep in mind that the current consensus expectation for the third quarter is 2% to 2.5% growth. 1.2% would be disappointing.
And keep in mind, also, that the advance GDP number could go from 1.2% to either 0.6% or 1.8% when it gets revised.
So why the big fuss over these very preliminary and very inexact numbers?
The Feds under the gun
Take a look at the pressure that these numbers put on the policy makers of the Federal Reserve -- just because theyre so ambiguous.
Officially, Alan Greenspan & Co. have said that theyre expecting 3.25% to 3.75% GDP growth in the U.S. economy this year. But if the June trend holds up on revision, it makes reaching that level extremely unlikely. If annual growth in the second half of 2002 is 2%, then the U.S. economy would finish the year with growth of about 2.5%.
That would be a miss big enough to require some kind of policy response.
And the Federal Reserve really cant afford to wait until the data are reasonably solid -- say, after the first reading of September-quarter numbers comes out at the end of October.
Which is why Wall Street is suddenly talking about an interest-rate cut as early as the next Federal Reserve meeting, on Aug. 13.
Editor's note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBC's Business Center most Wednesday nights at approximately 5:45 p.m. ET. Selected CNBC stories can be found in the TV Reports index.
At the time of publication, Jim Jubak owned or controlled shares in none of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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