2011 Q2 – GDP Growth Disappointing

On August 30th, 2011, posted in: Economic News, Newsletter by

Real GDP growth in the second quarter disappointed economists when it was revised down slightly but came very close to consensus expectations. The good news however, is the composition of the growth. It promises the economy in the second half of the year has some upward momentum. With net exports and inventories being revised downward while business investment in equipment/software, commercial construction, and personal consumption was revised upward, it demonstrates money is starting to move. The velocity of money is what creates economic growth.

This upward revision for business investment suggested increasing production of US companies. With inventories being revised down, there is more room for future re-stocking of shelves and showrooms. Most have concluded expansion of government spending to “stimulate” the economy didn’t work and won’t be continued. Government expansion has only helped create inflation, not real GDP growth. Further evidence of economic activity was the new ISM Manufacturing index declined only slightly to 50.6 in August from 50.9 in July. This was well above the consensus 48.5. (Remember, levels higher than 50 signal expansion; levels below 50 signal contraction.) All this despite the media pummeling the public with bad news – Europe, US debt default and the large swings in the stock market.

Other major measures of activity were mixed in August. The supplier deliveries index rose to 50.6 from 50.4 and the new orders index increased to 49.6 from 49.2.  The production index though, fell to 48.6 from 52.3 and the employment index fell to 51.8 from 53.5. The prices paid index declined to 55.5 in August from 59.0 in July. In other news, construction was up 2.2% reflecting growth in both residential and commercial.

GDP prices increased at a 2.4% annual rate in Q2 and is up 2.1% for the past year. Meanwhile, real GDP is up 1.5% from a year ago. Nominal GDP – real GDP growth plus inflation – is up 3.7% from a year ago. This is evidence the Fed’s “zero interest rate” policy is too loose and the inflation trend will continue upward. New orders for durable goods increased 4% in July, attributed to strengthening auto sales. The consumer price index rose 0.5%, further evidence inflation is definitely a growing factor for the Fed.

On the VERY plus side, corporate profits increased at a 12.8% annual rate in Q2 and are up 8.3% compared to a year ago. Most of the increase is attributed to domestic non-financial companies. These companies saw profits increase at a 38.6% annual rate in Q2 and are up 14.2% compared to 2010. Profits are at an all-time record high and are the highest share of GDP since 1950.

New Unemployment figures showed the “not so reliable index” at 9.1%. This is an independent survey of households which showed an increase in employment and an uptick in the labor force. These stats also reflect a strike at Verizon which resulted in 48,000 employees being layed off.  Continuing claims for regular state benefits declined 80,000 to 3.64 million, the lowest level since September 2008.

The housing sector delivered some good news. The FHFA index, which measures prices for homes financed by conforming mortgages, increased 0.9% in June, the third straight monthly rise and the largest gain for any month since 2005. Still, the index remains 4.3% below where it was a year ago. Sales of existing homes fell to an eight-month low in July (annualized rate of 4.67 million units).  The consensus had expected a gain to 4.90 million units due to the strong showing of pending home sales over the past couple of months.

A second “disappointment” came when Fed Chairman, Ben Bernanke, announced the Fed was not planning QE3. The Chairman stated the Fed would continue to evaluate the current economic situation, but had no specific programs or proposals at this time. Many think the Fed is waiting to see what President Obama is going to propose in his post-Labor Day address on the economy. If past is prologue, it is likely President Obama will not announce anything which will shift the markets. But it is all speculation until the President’s announcement and the Fed’s subsequent meeting in September.

ABOUT THE MARKETS

Despite Bernanke’s speech and the disappointing GDP report, this news couldn’t keep stock prices from experiencing one of their best weeks of the year.  The Dow [+4.32%; -2.53%], the S & P 500 [+4.74%; -6.43%], and the NASDAQ Composite [+5.89%; -6.52%] all gained, but remain in negative territory year to date. Past performance is no guarantee of future results. Indexes are not available for direct investment.

Warren Buffet’s highly-publicized investment of $5 billion into Bank of America (BAC) may have encouraged other investors to look for bargains created by the last three week roller coaster ride.

There is still about $2.7 trillion invested in Money Market Funds. This is a strong indicator, investors are still on the sideline waiting for the right moment to invest. There is always a “tipping point” where greed exceeds fear on the part of conservative investors and causes them to jump to stocks rather than stay on the sidelines.  But for now a zero return is far more appealing than the potential of a negative return.

Were you watching the U. S. Treasury bills this past week?  At Friday’s close, the yield on 90-day bills was -0.01% –  a negative return. Imagine PAYING the government to take your money. It’s probably an anomaly, but it does underscore the problem savers are facing with treasuries and money-market funds.  Add to this Mr. Bernanke’s recent comments indicating those yields aren’t going to change for a very couple of years.

At least we do NOT have an inverted yield curve. Long term Treasuries were up a bit in yield, even though they are down nearly a full percentage point for 2011.  Yields fell after QE2 ended – the Fed’s $600 billion bond-buying program.  Do we really need QE3?  The theory was low interest rates would stimulate the economy, create jobs, and improve stock prices. As reported by several analysts, “The Fed is pretty much out of bullets.”

On the International front, the Dollar has maintained value between $1.42 and $1.45 to the Euro (€). This is the result of the give and take between the weak U. S. economy and Europe’s sovereign debt crisis. European governments don’t seem to have any answers to the debt-limit problem, either. Unless and until these governments come up with a reasonable solution, investors will probably continue to invest in the U. S. on the theory it is safer.

ABOUT YOUR PERSONAL FINANCIAL PLANNING

Most investors are asking where they should put their money. There are no easy answers when the markets are so volatile and the safe harbors are paying no interest. Worse still, the lack of return is impacting retirement accounts and income planning.

At Wealth Teams, while no strategy guarantees success, we are continuing to see clients moving towards leveraged treasuring strategies that have done quite well in these markets.

If you have interest in learning how you can participate in this type of security, contact us and we can give you information so you can understand the strategy.

HERE’S A GOOD FINANCIAL WEB SITE

www.morningstar.com – we use this website for our analysis of market performance. The site provides information on stocks, mutual funds and ETFs – exchange-traded funds. It also has many analytical tools you can use to screen and sort funds based on your set criteria.

FINANCIAL FACT OF THE WEEK

How much do you owe? A recent report on consumer debt by the Federal Reserve Bank of New York shows current total consumer debt is $11.4 trillion, compared with a peak of $12.5 trillion at the end of September 2008. We owe as much as the government.

 

This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.

 

 

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