If you listened to the mainstream media, you would think that yesterday’s big report on Gross Domestic Product was much better than was expected. I’ll explain how this twisted thinking was almost believable.
The Bureau of Economic Analysis (BEA) released its “advance” estimate of 2Q GDP yesterday morning. Ahead of the report, the consensus was that it would show a gain of only 1.1%; however, the actual number came in at 1.7% (annual rate) for the 2Q. OK, the number was a little better than expected, but who can get excited over a number below 2.0%?
Then the other shoe dropped. The BEA also revised its estimate of 1Q growth from 1.8% reported last month to only 1.1%. You may recall that the BEA’s first estimate of 1Q GDP growth was 2.5%, then down to 1.8%, and now only 1.1%. So despite all the positive hoopla in the media, yesterday’s 2Q GDP report was indeed a FLOP.
Yesterday’s report marked a third straight quarter of GDP growth below 2.0%, a pace that is definitely too soft to bring down unemployment in a meaningful way. Consumer and government spending each grew less than expected in the 2Q, but were offset by a rebound in business spending and exports. The net result – a measly gain of only 1.7% – still the media cheered. What else is new?
As I discussed at length in Tuesday’s E-Letter, yesterday’s report also included landmark revisions to the government’s GDP statistics going all the way back to 1929. It was widely expected that these somewhat controversial revisions would add around 3% to the overall size of the nation’s economy. They were actually even a little better than that.
In late April, the BEA announced that the US economy topped $16 trillion for the first time ever in March. With the latest sweeping revisions announced yesterday, the BEA says GDP topped $16 trillion in the 1Q of 2012, a full year earlier than under the old methodology. As of the end of June, the BEA says the economy is now $16.6 trillion.
In other news, the Fed wrapped up its July 30-31 policy meeting yesterday. In light of the latest weak GDP report, the FOMC voted to continue its monthly QE purchases of $85 billion in Treasury bonds and mortgages indefinitely. That should come as no surprise to my readers. The next FOMC meeting will be held on September 17-18.
As this is written, the stock market is going wild with the Dow up almost 150 points and the S&P 500 Index now over 1,700. To what do we owe a debt of gratitude for a soaring market? Well, several things.
First, as I noted above, the FOMC meeting produced no surprises, so the continued injection of $85 billion per month will continue to stoke the market. The new unemployment claims also came in this morning at the lowest level since January of 2008 at 326,000, making it appear that the economy is gaining steam.
The next big news is the unemployment report for July that comes out tomorrow morning. It will either confirm and possibly extend this rally or bring it to a screeching halt. Wednesday’s ADP employment report came out better than expected, so if the government’s payrolls data follows suit tomorrow, it will likely stoke the fires of the stock market rally.
Yet what worries me the most is the fact that most everyone now assumes that the only way the stock markets can go is UP. Maybe so, but in my 35+ years in this business, it’s at times like this when the wheels tend to fall off. There’s always some unexpected surprise. Caveat emptor!
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