July 30, 2010

Economic Growth Slowed to 2.4% in Q2, but Michigan/Reuters Index Rose in July

Disappointment over faltering GDP is softened by buoyant news in other reports

The economy grew at a 2.4% pace in the second quarter, the Commerce Department reported Friday, July 30, a little less than economists had predicted and slower than the upwardly revised 3.7% rate for the GDP in the first quarter. But a few other reports softened the bad news on the overall slowing of the recovery, adding to this year's schizophrenic state of the economy.

Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, said that analysts' consensus estimate on the second quarter's GDP was 2.7%, but despite the disappointing headline number, there were some underlying strengths to the economy.

"Consumption rose only 1.6% in Q2, much weaker than implied by the monthly data, while foreign trade was even worse than we expected, subtracting a huge 2.8% from the growth," Shepherdson said in an analyst note.

But the positive news was elsewhere, he said, "Capital spending was strong, with equipment and software up 21.9% as replacement spending soared, and non-res structures rose 5.2%. Federal government spending was strong, with defense up 7.4% and non-defense--stimulus--leaped 13.0%."

Two other reports, added to the mixed economic news. The University of Michigan/Reuters consumer sentiment index for July rose slightly more than expected to 67.8 from a preliminary reading of 66.5. Economists expected it to rise to 67.

And the Chicago Purchasing Managers Index (PMI), which measures manufacturing activity in the Midwest, rose unexpectedly to 62.3 this month from 59.1 in June. Economists were expecting a drop to 56.0. The report is seen as an indicator of how the Institute for Supply Management's (ISM) nationwide index is likely to come in when it's released Monday.

"This is a pleasant surprise," Shepherdson said of the PMI. "What's more, the increase in the headline sentiment index is reflected in the key sub-indexes. New orders rose to 64.6 from 59.1, employment climbed to 56.6 from 54.2, just shy of the cycle peak of 57.2, and production nudged up marginally. The Milwaukee PMI, also just released, was better than we expected too."

Putting all this together, Shepherdson said, means that July's ISM index should come in close to June's number of 56.2, somewhat better than predicted before the Chicago PMI numbers were released.

Read a story about the third revision to the GDP for Q1 from the archives of InvestmentAdvisor.com.

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