Tomorrow’s GDP Report Isn’t Important

This going to be an interesting week for folks in the finance/econ stat biz. For one, Wall Street is about to close out its best September since 1939. Personally, I can do without the starting of major world wars.

I’m happy to say that the Buy List is also wrapping up a great month. Through yesterday’s close, we’re up nearly 13% for September and we hit our highest close in four-and-a-half months.

Tomorrow, the final GDP report comes out for the second quarter. This usually gets more attention than it deserves. The report will cover a period that began six months ago and ended three months later. The stock market usually focuses slightly forward, perhaps three to eight months ahead.

On Friday, we’ll get the ISM index for September. Here’s the odd thing: There’s a decent correlation between ISM level and GDP growth so we might get a glimpse at Q3 growth. The correlation is around 40% which is far from perfect but it’s worth paying attention to.

The past few quarters, however, have been a bit off-key. GDP growth has decelerated, meaning it’s still growing but the rate of growth has dropped over the last two quarters. That’s been one of the main drivers of the “Double Dip” thesis. I think the economy was impacted by problems in Europe much harder than people expected. The ISM has been fairly steady in the mid- to upper-50s. Normally, that signals growth of around 4%.

If the economy has been growing that quickly, then we would now see some evidence in the jobs market. Unfortunately, that evidence has been sorely lacking. While there’s been some growth in jobs, it’s nowhere close to the kind of growth we normally see coming out of a recession. During the 1990’s, the economy regularly created huge amounts of jobs each month. We’ll get a look at the jobs market next Friday when the Labor Department releases its jobs report for September.

Soon after that, earnings season will start. On October 7, Alcoa (AA) will be the first major company to report earnings. According to estimates, this earnings season will show a slight sequential decline from last quarter (meaning, Q3 earnings will be below Q2 earnings). I think estimates are just a bit too low, so that may mean there won’t be a sequential decline, but it’s hard to say right now.

Posted by on September 29th, 2010 at 11:54 am


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