Major U.S. stock indices continued their latest bounce as a good jobless claims report was able to offset a lower revision to Q3 GDP.  This three-session bounce in stock prices, mostly due to Tuesday’s 3% move, has reduced the correction (from the three-year high hit on April 29) back to just 8% -- thanks Santa!

Now, the reality is growth is much too soft to propel payrolls in the substantial and consistent manner needed to repair the job market – specifically, the long-term jobless problem.   Nevertheless, initial jobless claims have suddenly slid to their lowest level since July 2008 and that should result in a respectable December payrolls report.  (More on GDP and jobless claims beyond the click)

Financials and energy led the market higher.   Consumer staples and utilities were the day’s laggards – staples being the only group to actually close lower.

Oh, and joy of all joys, last evening Congress decided to extend the payroll tax reduction through February.  Yes!  We can now revisit this circus, among many other comedies, in about 60 days.

Market Activity for December 22, 2011

Sector Activity for December 22, 2011

CFNAI

The Chicago Fed’s National Activity Index came in at a reading of -0.37 for November (expected to come at -0.17) after the -0.11 print for October.  So these numbers show that the economy continues to grow at a below trend (below average) rate.  But we already knew this, so we focus on the three-month average.  Particularly, watching for a reading of -0.70 on that three-month figure, which would signal a fall back into recession.

That three-month average came in at -0.24, unchanged from October, so we remain nicely above that recession signal.

Q3 GDP Revision

The second revision to Q3 GDP (what’s known as the “final” revision, although this data is continually being revised on an annual basis) came in at a 1.8% real annual rate, which was down from the 2.0% via the previous revision and the 2.5% via the first look.  So with each revision the number has declined, yet this is still the strongest GDP print of the year -- pathetic.

The major reason for the downward revision was much less personal consumption than previously believed to be the case.  Personal consumption came in at a 1.7% real annual rate (down from the 2.4% it was believed to have increased via the initial print) – this segment has been running at about half the rate it usually does during this point in the business cycle.

And if not for strong business spending on equipment and software (up 16% annualized), which follows a weak 6.4% increase in Q2, and net exports (largely helping because import activity was lackluster), we’d be looking at GDP closer to 1%.

And here’s the question for business spending:  Is there a payback effect in 2012?  That is, in 2011 business may just have pushed activity forward to take advantage of the higher depreciation allowance that Congress put in place.  That tax advantage expires in 2012, and we may see a big shift down in business spending on equipment and software as a result.

So, assuming we get a 3.5% GDP print for Q4 (boosted by holiday shopping and firms spending before the higher depreciation allowance expires) for the entire year we’ll be lucky to have grown at a 1.75% real rate.  That’s below even PIMCO’s “new normal” of 2.0% and well below what used to be U.S. trend growth of 3.2%.

Jobless Claims

Well, initial jobless claims continue to look very good (for a second straight week) as they fell 4,000 to 364,000 – that beat the expectation, which anticipated a rise to 380K.

The four-week average fell 8,000 to 380,250 – that’s the lowest level since July 2008, but just barely as we were essentially here early in the year before claims ramped higher again.

Continuing claims made good progress too as they slid 215,000 – standard claims fell 79K and emergency claims (that extend out to 99 weeks) fell 137K.  And on those emergency claims, the increase that occurred in the week before (which I spent time focusing on last week) was not nearly as back as previously reported.

Last week the Labor Department reported that these extended claims jumped 332K, illustrating that many people who saw their standard claims expire rolled into this segment as they didn’t find a job.  Well, that number was revised much better to show they rose just 121K in the previous week, which means that the improvement in this latest week erases that damage.

We’ll see how the December payroll report turns out on January 6, but this jobless claims number suggests that it will be a good one.

Confidence

We had two confidence readings yesterday.  The first was the Bloomberg Consumer Comfort survey (the old ABC Confidence – it’s a weekly survey), which improved to a reading of -45.0 from -49.9 in previous week.

The second was the University of Michigan’s sentiment survey, which also improved with its rise to 69.9 from the 64.1 in November.

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Merry Christmas and Happy Hanukkah!

Brent Vondera, Senior Analyst

Phone: 636-449-4900