- U.S. unemployment claims remain in good shape as businesses hold on to their employees
- Q4 GDP expected to be revised slightly higher to +2.0%
- Q4 U.S. corporate profits report expected to reaffirm the end of the 2015-16 earnings recession
- When is the drop-dead date for a debt ceiling increase?
U.S. unemployment claims remain in good shape as businesses hold on to their employees — U.S. businesses continue to engage in the lowest level of layoffs in more than four decades, providing another illustration of the tight U.S. labor market. Initial unemployment claims are only +34,000 above the 44-year low of 227,000 posted in late-Feb. Meanwhile, continuing claims last week fell to a new 17-year low of 1.990 million.
The consensus for today’s report is for initial claims to fall by -11,000 to 247,000, reversing part of last week’s +15,000 increase to 258,000. The consensus is for continuing claims to rise by +41,000 to 2.031 million, more than reversing last week’s -39,000 decline to 1.990 million.
Q4 GDP expected to be revised slightly higher to +2.0% — The markets are expecting a slight upward revision for today’s Q4 GDP report to +2.0% from +1.9% (q/q annualized). The market is expecting today’s Q4 personal consumption report to be left unrevised at a strong +3.0%.
Q4 is long gone and the markets are mainly focused on the conflicting GDP forecasts for Q1 and on expectations for stronger GDP growth in 2017 and 2018. The Atlanta Fed’s GDPNow group is forecasting Q1 GDP at only +1.0%, mainly because of expected weakness in consumer spending, net exports, and inventories. Excluding inventories, the GDPNow forecast is stronger at +1.8%.
By contrast, the NY Fed’s Nowcasting group is forecasting Q1 GDP at a much stronger +3.0%. The NY Fed’s forecast puts more weight on sentiment data whereas the Atlanta Fed’s GDPNow mostly incorporates the raw monthly data as it is released. The market consensus for Q1 GDP in Bloomberg surveys is +2.2%, about in the middle of the tracking surveys.
In any case, the markets and the Fed generally believe that the U.S. economy is in good shape at present. The consensus is any weakness in Q1 would be a temporary aberration caused by transitory factors and by the residual seasonal factors that have hurt Q1 GDP in recent years.
After Q1, the market is expecting solid GDP growth of +2.4% in Q2 and +2.2% in the second half of 2017. The market is then expecting strong growth of +2.4% in the first half of 2018 as tax cuts and fiscal stimulus start to kick in.
Q4 U.S. corporate profits report expected to reaffirm the end of the 2015-16 earnings recession — Today’s third print for GDP will include the Q4 corporate profits data for the first time. The market is expecting a solid gain for Q4 corporate profits based on the fact that Q4 earnings growth for the S&P 500 companies was respectable at +7.5% y/y, improving from +3.9% in Q3.
U.S. corporate profit growth in Q3 rose by +2.1% y/y, breaking the 5-quarter string of negative year-on-year corporate growth figures. A second quarter of positive profit growth in Q4 today would reaffirm the end of the 2015-16 earnings recession.
Looking ahead, the market is expecting a sharp +11% gain in S&P 500 earnings growth in 2017, according to surveys by Thomson I/B/E/S. That would be much better than the paltry SPX earnings growth rates seen in 2015 of +0.2 and in 2016 of +1.4%.
The market’s expectation for strong earnings growth in 2017 is a key driver behind the recent rally in stocks, in addition to the post-election surge in consumer and business confidence and hopes for the pro-growth Republican agenda. The market’s expectation for strong 2017 earning growth is also a key reason why the stock market was able to survive last week’s Obamacare stumble with modest damage.
When is the drop-dead date for a debt ceiling increase? — The drop-dead date (also known as the “X Date”) for a debt ceiling hike will fall sometime in October or November, according to analysis by the Bipartisan Policy Center. The group says the date could come as soon as October 2 when the Treasury has to make some large payments to government trust funds. The debt ceiling was reinstated on March 15 and the Treasury is already taking extraordinary measures to avoid exceeding the ceiling.
The drop-dead date for a debt ceiling hike is hard to predict in part because of uncertainty about exactly how much tax revenue the Treasury might receive in coming months. The Treasury has yet to announce a drop-dead date for a debt ceiling hike. The Congressional Budget Office has only said the date will occur sometime this “fall.”
On the actual drop-dead date, the Treasury’s cash balance will be zero and it will have no ability to further juggle its accounts to raise cash. The Treasury at that point will effectively be bankrupt, living day-to-day on incoming tax revenue and failing to pay some of its bills. The Treasury may not be able to make payments, for example, to government trust funds, government employees for salaries, Social Security recipients, state and city block grants, vendors, etc. If the Treasury fails to make an interest or principal payment that is due on a Treasury security, then the Treasury will have officially defaulted on its sovereign debt, tripping what would certainly be a systemic financial crisis.
The good news is that the Congress and the President can raise the debt ceiling anytime they wish. The bad news is that Washington politicians will once again be tempted to use the debt ceiling as a hostage to try to advance partisan priorities, with the markets and potentially the economy suffering in the breach.