The most comprehensive statistics on the U.S. economy
– the report on Gross Domestic Product (GDP) – was released July
31 for the second quarter.
The most comprehensive statistics on the U.S. economy – the report on Gross Domestic Product (GDP) – was released July 31 for the second quarter.
It showed real GDP rose 2.4%, a little less than expected, but a substantial acceleration from the first quarter rise of 1.4%.
While some special factors added to the second quarter performance, chiefly a sharp rise in Federal government purchases (defense spending), other factors held back overall growth.
Foreign economies remained sluggish – so their companies exported to us, providing stiff competition to United States companies and pushing up our imports.
Domestically, while consumers accelerated spending, income growth remained sluggish due to weak employment.
And state and local governments, strapped for cash, cut spending by 1.5% in real terms.
It is starting to look like a more balanced economic engine that, while not yet hitting on all cylinders, is rapidly headed in that direction.
Consumer spending was strong, rising 3.4% in real terms. Housing rose 6.1%. Business spending is starting to turn back up.
Business investment in equipment rose 7.4% and spending on business structures finally rose 4.8% following six straight quarterly drops.
This upturn in private sector demand was partly met from inventories, which fell over the quarter and from imports, which rose sharply.
The drop in inventories is likely temporary. You can expect U.S. companies to be gearing up production over the second half of the year to meet stronger demand and to rebuild inventories.
This trend should continue to spur capital investment and finally start to generate rising employment.
Inflation remains very subdued, with the GDP price index rising at an annual rate of only 1% in the second quarter. But prices do appear to be rising, possibly the deflation scare is ending.
Improvement in the economy will translate into higher company earnings, both from top line (revenue) growth as well as from lower costs.
While not all large companies have reported second quarter earnings yet, of the 361 companies that have, 75% have met or beat earnings expectations, so we are getting some confirmation.
This can help rebuild confidence in the equity markets.
Dan Newquist is a Registered Representative with Linsco/Private Ledger (Member SIPC) and has an office in downtown Morgan Hill.
