This week’s US gross domestic product (GDP) data paints a less gloomy first-quarter decline than first published and a bright picture for the second quarter [which,] as impressive as the rebound looks on the surface, we think is actually understated. Here’s why.
The above our introductory comments are edited excerpts from an article* by Joseph G. Carson (AllianceBernstein.com) entitled US Rebounds – With More Upside Likely.
The following article is presented courtesy of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Carson goes on to say in further edited excerpts:
Wednesday’s initial report on second-quarter real GDP showed 4% annualized growth and an upward revision to the first-quarter’s decline, from –2.9% to –2.1%. The report also revised GDP for the past three years, revealing a much stronger underlying growth trend starting in the second half of 2013.
Impressive Growth, but Likely Understated
The report shows US growth being propelled by relatively strong gains in key cyclical private sectors, such as GDP goods (manufacturing) and GDP structures (construction). Gains were especially strong in the second quarter, as GDP goods increased by 10.5% annualized and GDP structures increased by 8%. Those results more than offset the first-quarter weather-related declines of 8.5% and 3.8%, respectively.
As impressive as the second-quarter rebound looks on the surface, we think the data still understates the recovery. There are two fundamental reasons why we think reported growth in the second quarter—and the entire first half of 2014—looks too low:
1. A Major Drop in First-Half Unemployment
History shows that real GDP growth is highly correlated with substantial changes in the civilian unemployment rate. During the first half of 2014, unemployment declined by 0.7 percent—a feat only duplicated 13 times since 1960…[and] the average GDP growth during those 13 periods was 6%–7%, which puts the first half of this year well below the norm—according to the current estimates (see chart below). Of course, GDP for the second quarter and first half is still preliminary, but the jobless rate is hard data—and never revised – so, the sharp decline in the jobless rate suggests that GDP data will be upwardly revised—maybe substantially.
2. Strong Earnings Reports
Implied operating profits for the second quarter show a year-over-year decline of 3%…[which] runs counter to incoming earnings reports…from 320 of the 500 companies in the S&P 500 Index which report that operating earnings are running 6% to 7% higher than a year ago. If this gain holds up once all company reports are in, the growth in nominal gross domestic income (GDI) in 2Q would equal about 9% annualized. That’s far above the 6% annualized growth reported for nominal GDP.
It’s hard to fathom the possibility of an upward revision to nominal GDP of three full percentage points, but we think Gross Domestic Income has historically been a more accurate predictor of significant shifts in economic growth rates than GDP has and GDI points to continued strong gains in the second half of 2014—if not beyond…
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://blog.alliancebernstein.com/index.php/2014/08/01/us-economy-rebounds-with-more-upside-likely/ (© 2014 AllianceBernstein L.P.)
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