GDP Surges Above Trend, Inflation Decelerates Meaningfully, Confidence Rises

- Advance 2Q GDP rose 3.4% versus estimates of a 3.2% gain and a .6% increase in 1Q.

- Advance 2Q Personal Consumption rose 1.3% versus estimates of a 1.5% gain and a 3.7% increase in 1Q.

- Advance 2Q GDP Price Index rose 2.7% versus estimates of a 3.4% increase and a 4.2% gain in 1Q.

- Advance 2Q Core PCE is estimated to rise 1.4% versus estimates of a 1.4% increase and a 2.4% rise in 1Q.

- Final July Univ. of Mich. Consumer Confidence came in at 90.4 versus estimates of 91.2 and a prior estimate of 92.4.

BOTTOM LINE: The US economy grew more than forecast last quarter, propelled by rising exports, commercials construction and government spending, Bloomberg said. The 3.4% gain in GDP was the best showing in more than a year. The Advance 2Q PCE Core, the Fed’s favorite gauge of inflation, rose only 1.4%, a meaningful decline from first quarter and the smallest increase in four years, even with oil in the $70s. Fed policy makers, including Bernanke, have said they prefer for the core pce to rise between 1-2%. Business Fixed Investment, which includes spending on commercial construction as well as equipment and software, rose at an 8.1% annual rate versus a 2.1% rate in 1Q. As I forecast back in March, when talk of an imminent recession was all the rage, growth came in above trend this quarter. I suspect growth will average around 3% for the remainder of the year as this quarter comes in slightly below trend and fourth quarter comes in slightly above trend. As well, inflation measures should continue to decelerate meaningfully, thus providing a very positive backdrop for stocks.

Confidence among US consumers rose in July as gasoline prices dropped from record highs and the labor market continued to show strength, Bloomberg said. The final index of confidence rose to 90.4 from 85.3 in June. The current conditions component of the index rose to 104.5 from 101.9 the prior month. The average price of a gallon of regular gas has fallen from $3.23 on May 23 to $2.92/gallon yesterday. I continue to believe both main gauges of consumer sentiment will reach new cycle highs over the intermediate-term as stocks rise further, gas prices fall meaningfully, inflation decelerates further, housing-related fears subside, wages continue to substantially outpace inflation and unemployment remains historically low.