2nd Quarter GDP at 3.3% 8/30/2008

The long awaited 2^nd Quarter GDP (gross domestic product) figure was released early yesterday at 3.3% - revised up from 1.9% - a huge improvement over almost every estimate and a staggering blow to the ‘recessionists’ in the market. Though the investment markets were obviously paying attention, the DOW rose by nearly 200 points, the media at large focused virtually all their attention on the Democratic National Convention and McCain’s VP choice, now known to be Governor Palin of Alaska. The only truly important news of the day went nearly unnoticed and you can bet that though it wasn’t heralded at the Democrat’s convention in Denver, it will certainly be a hot topic at the Republican convention next week.

Noted economist, Larry Kudlow, who admits he is a ‘glass half full’ kind of guy, proclaimed the end of any credible recession talk some eight months ago on the strength of employment figures announced at that time. Many continued to doubt, and more recently others have begun to point fingers at Kudlow and those of us who have consistently defended the strength of the US economy. With 1^st Quarter GDP growth already reported at 1% and 2^nd Quarter figures in at 3.3%, Kudlow and others are vindicated. Now, this doesn’t mean that the economy hasn’t struggled and that there aren’t problems that still need to be dealt with. But the single strongest indicator of the health of the US economy is the growth, or retraction, of the gross domestic product. It tells us clearly whether we’re moving forward or backwards, and at what pace. With the pace at 3.3% during a calendar quarter that also met with staggering energy prices, constrained availability of credit, slumping jobs figures and various international concerns, it is a clear sign of the long-term strength and resiliency of US business. Also reflective of this is the recent strengthening of the US dollar and the some reduction in the trade deficit.

Housing, credit, energy, federal deficits, and politicians are still issues to be concerned about. While the politicians will work themselves out, or in as the case may be, with the help of the electorate, the remaining issues will take time and likely some level of discomfort to deal with.

In other recent economic reports, we see that personal incomes reflected a .7% decline in July over the same period a year ago, but July durable goods orders were up by 1.3%. The first of these tells us what has already happened, and the second gives us a look into the future some six to nine months out.

As noted in last week’s Signature Update, the market is an excellent indicator of the economy six to nine months into the future. By then, the housing markets will have had that much more time to work themselves out, and we should be approaching a point where excess housing inventories may still be higher than usual, but nothing like the excess inventory in 2007 and early 2008 that sent prices plummeting. The credit markets will have shaken out a few more weak financial institutions and are likely to begin to open up some. The demand for energy is likely to continue its domestic and international decrease and the US dollar is likely to have benefitted, each of these may have a positive effect on energy costs.

The recent climb in the DOW from July’s 10,850 low to today’s level of 11,600 simply supports the market’s confidence that these elements are headed in the right direction. The markets despise uncertainty, and when it becomes clear who the next US president will be, it is likely that the markets will reward investors with additional gains. The rhetoric of the president and his administration may color the level of those gains, of course, but at least we’ll know what we’re going to be dealing with, rather than left to wonder and muse about the possibilities – both good and bad. Jeff Thredgold, in his weekly internet based economic column, Tea Leaves, (http://www.thredgold.com/html/leaf080827.html) points out numerous positive points to remember in the US economy. Thredgold’s offering this week is titled ‘Happy Talk’ and is worth reviewing.