Jobless claims data positive, no US slowdown evident

In the week ending December 23, initial jobless claims were just 245,000, keeping the average below 240,000 yet again. With claims still below year ago levels, there are no signs in the data that a US slowdown is coming. As a result, we may see two more quarters of growth over 3%, keeping the Fed on track for rate rises despite the flattening US yield curve.

We have been around the 250,000 claims mark throughout 2017, and that compares favourably to 2016. There is no sign in the data that US companies have begun laying off more workers, something that would depress consumer spending. And so given positive forward-looking data regarding new orders in both the manufacturing and services ISM reports, we should expect output to continue to expand at a relatively brisk pace.

Both the Atlanta Fed and the New York Fed’s GDP nowcasts show Q4 2017 output growth in the 3% range. If this trend holds through March, we will have 4 consecutive quarters of annualized growth in the 3% range. That as a level that would see the Fed increasing interest rates at least once in the winter and likely again in the spring, meaning we should expect 50 more basis points of rate rises by summer, if the trends hold. Blue Chip consensus forecasts are at 2.7% for this quarter.

The downward revision to the Atlanta Fed GDPNow tracker from 3.3% to 2.8% last week is the one data point which says the trend might not hold. Even so, while the yield curve could steepen somewhat in the winter from the present 53 basis points on the back of economic optimism, there are no instances in the post-Volcker rate targeting era in which tightening cycles were followed by curve steepening. Tightening has been associated with flattening until the Fed is forced to pause.