Recent US Growth Best in 19 Years, Inflation Contained, Confidence Improving, Manufacturing Rebounding Vigorously

- 2Q Advance GDP rose 3.4% versus estimates of a 3.5% rise and a 3.8% gain in 1Q.
- 2Q Advance Personal Consumption rose 3.3% versus estimates of a 3.5% increase and a 3.5% gain in 1Q.
- 2Q Advance GDP Price Index rose 2.4% versus estimates of a 2.6% gain and a 3.1% rise in 1Q.
- The 2Q Employment Cost Index rose .7% versus estimates of a .8% increase and a .7% gain in 1Q.
- Final Univ. of Mich. Consumer Confidence for July was 96.5 versus estimates of 96.5 and a prior estimate of 96.5.
- Chicago Purchasing Manager for July rose to 63.5 versus estimates of 55.0 and a reading of 53.6 in June.

BOTTOM LINE: The US economy grew at a 3.4% annual pace in the second quarter, the ninth straight quarter exceeding 3%, as sales boomed, allowing companies to pare bloated inventories, Bloomberg reported. The string of quarterly growth increases exceeding 3% is the longest since the 13 quarters ended in the first three months of 1986. A measure of demand excluding inventories rose 5.8%, the fastest rate in almost 2 years. The measure of prices paid by consumers for goods and services excluding food and energy increased at a 1.8% annual rate versus a 2.4% increase in 1Q. A narrowing trade deficit added 1.6 percentage points to GDP, the most since the fourth quarter of 1996. I now expect US GDP growth to come in around 4% during 3Q.

Employment costs, the main component of inflation, rose less than expected as benefit costs showed the smallest gain in more than three years. The Fed said in its Beige Book report that wage pressure “remained moderate.” This is more evidence that inflation is contained.

US consumer confidence rose to the highest level this year, boosted by a booming housing market, rising stocks market and a healthy labor market. The current conditions index, which reflects Americans’ perception of their financial situation and whether it’s a good time to buy big-ticket items, rose to 113.5 from 113.2 the prior month. The expectations index rose to 85.5 from 85 in June. This is a positive considering the terrorist bombings in London and record gas prices. I expect confidence to increase through year-end.

The Chicago PMI soared in July by the most since 1983 as manufacturing accelerated from en early year slump. The new-orders index jumped to 69.6 from 56.5. The production index increased to 70.5 from 57.8 and the prices paid index increased modestly to 61.3 from 59.7 the prior month. The manufacturing correction is definitely over and should help boost GDP in subsequent quarters.