A Stronger Rebound, But Moderate Pace Likely

Today’s Gross Domestic Product report shows a stronger rebound for the U.S. economy in the second quarter, but no major shifts in the recent trends.

Data released today by the U.S. Department of Commerce show second quarter real GDP grew 3.7 percent following a first quarter gain of 0.6 percent. Along with today’s revised estimate of second quarter GDP, Commerce also released estimates of corporate profits for the second quarter. 

Upward revisions to GDP were broad based with consumer spending, business investment, housing, inventory accumulation, net trade and government spending all adjusted higher. Unadjusted after-tax corporate profits rose 5.1 percent or $89 billion to an all-time high $1,823.7, which should provide a good foundation for equity markets.

On the inflation front, price measures in today’s release show consumer prices remain very tame with the core Personal Consumption Expenditures price index increasing 1.3 percent from a year ago.

We continue to expect moderate growth in the quarters ahead, and for inflationary pressures to pick up slightly, but price increases to remain below the Fed’s target.  The moderate pace of price increases gives the Fed more flexibility in deciding when to implement the first rate hike, which may be important in light of recent global events. Regardless of liftoff, we expect the pace of future rate increases to be substantially slower than previous tightening cycles.