More Of A Muddle Through Economy But Details Offer Hope

The U.S. ‘Muddle Through’ storyline of growth continues as the economy expanded more in the second quarter of 2012 than initial reports. The Department of Commerce released a report that second quarter GDP growth came in at 1.7% on an annualized basis. This is an improvement from the initial report of 1.5% reported in July. Yesterday’s figure is the first of two revisions on the initial report and equaled expectations as evident by the median survey of forecasts by economists.

Beyond the headline numbers, the components were mixed. Personal Consumption, highlighted by gains in demand for Services and Household Consumption, improved to 1.7% from the initial report of 1.5%. In addition, a 6.0% increase versus the advance estimate of 5.3% in Exports added to the headline number. Government expenditures were less negative with today’s release showing a decline of 0.9% from a previous estimated fall of 1.4%. Imports fell from 6.0% to today’s revised report of 2.9% while Private Investment was revised from 8.5% to 3.0%.

While the headline improved and was in-line with market expectations, the real news lies in the Real Final Sales component which was better at +2.0% from 1.2% as reported earlier. Real Final Sales represents gains less changes in Inventory suggesting higher demand and production gains. Deutsche Bank’s Chief Economist provided color on this tidbit of information in their latest Macro Data Flash report:

The fact that GDP was revised higher but inventory accumulation was less significant bodes well for economic activity in the second half of the year. Less inventory building suggests that production momentum should be more durable. Thus, these revisions are favorable for our broader forecast of a growth acceleration in the second half of the year, consistent with what has occurred in each of the past three years.

In addition, Aggregate Corporate Profits surged higher, reversing a decline seen in the first quarter. Deutsche Bank wrote that this also bears watching since it may translate to job growth in the coming months.

Corporate profits rose 0.5% in the quarter, or 6.1% in year‐on‐year terms. The fact that corporate profit growth is holding up in the mid‐to‐high single digits is a positive development for private sector investment and hiring—although in the short term, economic uncertainty (in part due to the fiscal cliff) is taking a toll.

That said, and given that the Unemployment Rate ticked higher last month, all eyes will be watching the next jobs report which is set for release on the first Friday of September. Hopefully, profit gains in the private sector will translate to more robust growth in jobs as Deutsche Bank suggests. Naturally this should bode well for equities and other risk assets going forward and may give reason for the Federal Reserve to put QE on hold for the time being.

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