2Q GDP Accelerates, Inflation Decelerates, Jobless Claims Rise, Manufacturing Unexpectedly Expands

- Advance 2Q GDP rose 1.9% versus estimates of a 2.3% gain and a downwardly revised .9% increase in 1Q.

- Advance 2Q Personal Consumption rose 1.5% versus estimates of a 1.7% increase and a downwardly revised .9% gain in 1Q.

- Advance 2Q GDP Price Index rose 1.1% versus estimates of a 2.4% gain and a downwardly revised 2.6% increase in 1Q.

- Advance 2Q Core PCE rose 2.1% versus estimates of a 2.0% increase and a 2.3% gain in 1Q.

- The 2Q Employment Cost Index rose .7% versus estimates of a .7% gain and a .7% increase in 1Q.

- Initial Jobless Claims for this week rose to 448K versus estimates of 393K and 404K the prior week.

- Chicago Purchasing Manager for July rose to 50.8 versus estimates of 49.0 and 49.6 in June.

BOTTOM LINE: The US economy accelerated during the second quarter as the effects of the federal tax rebates took hold, Bloomberg reported. The trade deficit shrank to a $395.2 billion annual pace during the quarter, adding 2.4 percentage points to growth, the most since 1980. Residential construction fell at a 15.6% annual rate after dropping 25.1% in the first quarter. The decline subtracted .6 percentage point from growth, the least in more than two years. The GDP Price Index rose 1.1% during 2Q, the smallest increase in 10 years and down from a 2.6% rise in 1Q. The Core PCE, the Fed’s preferred inflation gauge, decelerated to 2.1%, which is close to the Fed’s target of 1-2%. According to Intrade.com, the percentage chance that the US slips into recession this year is 19.5%, down from a 79% chance in Mid-March. I expect 3Q GDP to come in around 1.5% and inflation to decelerate further on the fall in commodities.

The number of Americans filing first-time claims for unemployment benefits unexpectedly rose last week, Bloomberg reported. The four-week moving average of claims rose to 393,000 from 382,000 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose to 2.5% from 2.3% the prior week. 13 states and territories reported an increase in new claims, while 40 reported a decline. I expect jobless claims to decelerate next week and still expect non-farm payrolls, released tomorrow, to come in modestly better-than-estimates of -75K.

A measure of US business activity unexpectedly rose in July, led by a gain in orders, and is now indicating expansion, Bloomberg said. The New Orders component rose to 53.5 from 52.0 in June. The Order Backlogs component rose to 45.7 from 42.3. The Employment component fell to 45.9 versus 46.7 the prior month. The Inventories component rose to 54.9 from 50.5. The Prices Paid component rose to 90.7 versus 85.5 the prior month. I suspect July will mark the high point for the prices paid index. The CRB commodities index, the main source of inflation fears, has declined 12.2% since July 2. I expect manufacturing gauges to continue to indicate mild expansion next month. After an initial sell-off, the US Dollar Index is just slightly lower on today’s reports and is at session highs. The 10-year yield is falling 9 basis points. The BankRate.com avg. 30-year fixed mortgage rate is 6.35%, down 16 basis points in a week.