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Economy Continuing to Muddle Along, Better Activity Seen In the Months Ahead

Wednesday, 29 August 2012 11:18 AM

INDICATOR: Revised Second Quarter GDP/July Pending Home Sales

KEY DATA: GDP: Up 1.7 percent (initial estimate: Up 1.5 percent); After-Tax Corporate Profits: Up 1.1 percent/Pending Home Sales: Up 2.4 percent

IN A NUTSHELL: “The economy did a little better than initially thought, but the growth rate remains disappointing.”

WHAT IT MEANS: Normally, I don’t bother commenting on revised gross domestic product numbers. They are the past and we are usually wrapped up in current trends.

However, there were great expectations for the spring data. Sometimes great expectations are crushed. Sometimes they are met. Just ask Charles Dickens, who apparently thought both approaches made sense. But enough about literature, let’s get back to economics.

Recent data seemed to point to second quarter growth being about 2 percent. While the economy did expand a touch faster than had originally been estimated, the upward revision was modest.

There were greater personal consumption expenditures, exports and state and local government spending. However, inventories were lower and business investment in software and equipment was more modest. Thus, the total change was limited.

There was a positive aspect of the report: Corporate profits rose after having plunged earlier in the year.

In a separate report, pending home sales jumped to its highest level in more than two years. At that time, though, the homebuyer tax credit was about to end so sales were hyped. Thus, it is clear that the current sales pace is sustainable and is likely to keep rising.

MARKETS AND FED POLICY IMPLICATIONS: The economy continues to muddle along, though improving profits and a strengthening housing market should lead to better activity in the months ahead.

But mediocre does not create lots of jobs or raise confidence much. So don’t expect growth to suddenly accelerate. That is not likely to happen.

The issue the GDP raises is what will the Fed do? Growth is neither strong enough for Federal Reserve Chairman Ben Bernanke, who speaks on Friday, to take any additional easing off the table, but it is hardly weak enough to force him to announce new actions.

So, he will likely be a very good Fed Chair and temporize.

The markets might not like that, but that is the reality of the not-too-hot, not-too-cold but not-just-right-either economy.

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Wednesday, 29 August 2012 11:18 AM
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