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The Economy Surges Higher, But Is It For Real?

The Economy Surges Higher, But Is It For Real? by Gary D. Halbert

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 29, 2015

IN THIS ISSUE:

  1. 2Q GDP Report Was Better Than Expected at 3.9%
  2. The Problem With How the Government Measures GDP
  3. Janet Yellen’s Supposed “Flip-Flop” on Monetary Policy
  4. Fed’s Latest Uncertainty Leads to More Turmoil in Stocks
  5. Sunday’s Rare SuperMoon, BloodMoon & Lunar Eclipse

Overview

Today we look at last Friday’s better than expected final report on 2Q GDP, which was revised from 3.7% to 3.9%. Best of all, this increase was largely due to increased consumer spending which accounts for almost 70% of GDP. Following the paltry 0.6% increase in GDP in the 1Q, this means the economy grew by 2.25% in the first half of this year.

While a 3.9% jump in economic growth in the 2Q was welcome news, there is a growing consensus that such reports from the government may not be remotely accurate. The problem is, many agree, that the government’s “seasonal adjustments” to the monthly and quarterly data have gotten out of control, and the numbers reported are no longer reliable. We’ll talk about this below.

Next, we’ll look into what many are calling a “flip-flop” on the part of Fed Chair Janet Yellen in the last two weeks on the subject of when short-term interest rates are likely to be raised. At the Fed’s latest policy meeting on September 17, they decided to postpone the first rate hike in nearly a decade, seemingly indefinitely. But then last Thursday, Yellen said lift-off will happen before the end of this year, and this sparked the latest selloff in the equity markets. So, what gives?

I will close today with a few thoughts about the SuperMoon, BloodMoon and lunar eclipse we saw on Sunday night. I hope you got to view it.

And finally, our latest WEBINAR with ZEGA Financial is now available for viewing on our website. ZEGA’s strategy for using options is one of the most interesting I have ever seen.

2Q GDP Report Was Better Than Expected at 3.9%

The US economy expanded more than previously estimated in the second quarter on stronger consumer spending and construction, the second upward revision in a row. The Commerce Department said on Friday that Gross Domestic Product rose at a 3.9% annual pace in the April-June quarter, up from the 3.7% pace reported last month. This was the third and final estimate of 2Q GDP.

The rise to 3.9% beat the pre-report consensus of 3.7% and was driven by growth in consumer spending, mainly on services like health care and transportation. Consumer spending, which accounts for more than two-thirds of US economic activity, was revised up to a 3.6% growth pace in the 2Q from the 3.1% rate reported in August, helped by cheap gasoline prices and relatively higher house prices which are boosting household wealth.

Revised construction spending data helped to push up the headline figure, with non-residential fixed investment expanding 4.1% in the quarter. The revisions to 2Q growth also reflected a smaller accumulation of business inventories than earlier estimated.

Private-sector inventories grew by $127.5 billion in the second quarter, close to the growth in the first quarter. Most forecasters expect slower inventory accumulation to shave off one percentage point from the 3Q growth rate, leaving it slightly above 2%. It now looks like the economy will do well to record 2.5% growth for the whole year.

After-tax corporate profits were also stronger in the 2Q than previously thought. Profits after-tax with inventory valuation and capital consumption adjustments were revised to show a 2.6% rebound from a slump in late 2014 and early 2015, instead of the 1.3% increase reported last month.

The better than expected performance in the 2Q followed the paltry 0.6% pace in the 1Q. In the first three months of the year, a harsh winter and a port slowdown on the West Coast forced many companies to keep their products on the shelf rather than selling them. As a result, the economy grew at only a 2.25% pace in the first half of the year, a slightly higher pace than in the first half of last year.

The Problem With How the Government Measures GDP

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