In the week ending March 1, the advance figure for seasonally adjusted initial claims was 351,000 (351K), a decrease of 24K from the previous week’s revised figure of 375K. The 4-week moving average (4WMA) was 359K.
This is a welcome bit of good news. This week’s 351K initial claims number more than reversed the +21K increase the week before, from 354K to 375K, that fed concerns about the slowing economy. Before we break out the champagne, we should note that the seasonally unadjusted number actually increased by 13K, from 330K to 343K. I am not convinced we should believe the Commerce Department’s seasonal adjustment factors. They are calculated by extracting monthly patterns from data during periods where everything was normal–things are not normal today.
The claims numbers are a little higher than a year ago (327K) when the economy was humming along but not high enough to imply falling GDP. The last episode of negative GDP growth was after the dot-com bust when we saw (-0.5%) in both Q3/2000 and two quarters later in Q1/2001, then (-1.4%) in Q3/2001. Initial claims in Q3/2001 ranged from 394K to 517K on a base of 128 million jobs, equivalent to 410K-537K with today’s 133 million job base.
Don’t get me wrong. I’m not saying the economy is great. I’m saying that the real problems are not in the GDP accounts. The problem lies in the capital markets, where investors have lost all faith in their ability to understand the future cash flow stream they should expect from asset-backed bonds and other fixed-income securities.
The GDP fixation of both policy makers and the economics community has focused their attention on textbook macroeconomic remedies designed to spike spending. What we need are policies to restore the visibility over future cash flows. What we are getting is $600 checks and Congressional proposals–cram-down bankruptcies and price controls–that undermine property rights and make it still more difficult to value securities. Nero is fiddling while the bond market is getting worse.
The fatal flaw behind the troubles is the same one that killed the inappropriately-named Long-Term Capital Management just 10 years ago. The finance theory taught in business schools–modern portfolio theory, the capital asset pricing model, and the Black-Scholes theorem used to construct the opaque securities we call structured products–rests on the twin foundations that capital markets are always in equilibrium and open for business and that volatility is an acceptable metric for risk. Neither us true. As long as we use Black-Scholes to create and price securities we will suffer from periodic blackouts like this one.
So far, in spite of the massive wealth losses in both real property and stocks,we have managed to keep the GDP economy that provides paychecks growing. We owe that to the fact that the non-price credit rationing that has plagued real estate and leveraged loans has not spread to business loans. Commercial and industrial loans are the principal source of the working capital that private small and medium sized companies need to meet payroll, buy raw materials and keep current with their vendors. If that were to happen things would quickly get a lot worse.