Second-quarter GDP likely to solidify sense of progress

The U.S. economy is nearly a month into the third quarter, but we still don’t have a fully clear picture of the way the year’s first half ended.
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The U.S. economy is nearly a month into the third quarter, but we still don’t have a fully clear picture of the way the year’s first half ended.

Republican presidential candidate Donald Trump says the economy is in poor shape, but he is running for president and — like all candidates for the nation’s highest office — he strives to identify gaps and weaknesses in the nation’s economic life and suggest that he is the one to overcome them.

Fortunately for economy watchers, there are hard numbers to measure progress, and one of the most comprehensive ones — gross domestic product — comes into focus this week.

The Commerce Department will give us our first look at second-quarter GDP on Friday. The consensus forecast of economists is that the economy grew at a rate of 2.5 percent, up from 1.1 percent in the first quarter, signaling that momentum is building for the second half of the year.

As Sam Bourgi at EconomicCalendar.com points out, job growth of 287,000 in June was the highest in eight months. Upbeat reports on industrial production, retail sales and home sales during the month contributed to a sense that the economy is improving.

Bourgi also points out that the dollar reached a six-week high against the Japanese yen and hit a two-month high against the Canadian dollar last week.

“The recent performance of the dollar is tied to perceptions about the U.S. economy,” Bourgi said. “Stronger domestic output strengthens the case for the Federal Reserve to begin raising interest rates this year.”

The Federal Open Market Committee, the Fed’s rate-setting panel, is meeting today and Wednesday. It is not expected to raise rates, but economy watchers would do well to pay attention to what the panel says about the economy’s recent performance.

"It's just a situation where they want to keep their options open. They're not going to be specific about most things," Michael Hanson, senior economist at Bank of America Merrill Lynch, told CNBC. "I can't imagine them giving any strong signal about September being on the table, but September has some probability. It's not zero. In terms of the statement, they're likely to acknowledge that the data is a bit better."

Hanson said he expects the Fed’s next rate increase to occur in December.

Ahead of the GDP report this week are several important measures of the economy’s strength and the consumer’s mood that are on the docket. Today we will get a look at new-home sales for June; the consensus forecast is that they climbed to a seasonally adjusted annual rate of 560,000, up from 551,000 in May.

Last week, we learned that home resales rose 1.1 percent in June, to a seasonally adjusted annual rate of 5.57 million, 3 percent higher than a year earlier and the best showing since February of 2007, according to the monthly report from the National Association of Realtors.

Lawrence Yun, chief economist for the NAR, said in a statement that an impressive four-month streak of sales gains through June capped a solid first half for the housing market.

"Existing sales rose again last month as more traditional buyers and fewer investors were able to close on a home despite many competitive areas with unrelenting supply and demand imbalances," he said. "Sustained job growth, as well as this year's descent in mortgage rates, is undoubtedly driving the appetite for home purchases."

Yun sounded a note of caution about the second half.

"Looking ahead, it's unclear if this current sales pace can further accelerate as record-high stock prices, near-record low mortgage rates and solid job gains face off against a dearth of homes available for sale and lofty home prices that keep advancing," he said.

Housing starts rose more than expected in June — 4.8 percent, to a seasonally adjusted 1.19 million units — but Reuters reported that data from previous months that were downwardly revised suggests that the picture is not as bright as it seems.

"Builders are building. But we have seemingly hit a lull, and permit requests and construction activity are no longer accelerating sharply," Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania, told Reuters.

The Consumer Confidence Index for July is due today, and the forecast is for a slight drop, to 97.0, from 98.0 in June. The University of Michigan’s final Consumer Sentiment Index for July will be out on Friday, and expectations are for a reading of 91.0, up from 89.5 at mid-month.

The mood of U.S. consumers has lately been stable, despite the fact that this is an election year and the economy is always a flash point when the nation’s highest office is on the line.

The monthly report on durable goods orders for June is due Wednesday, and the forecast is for a drop of 0.6 percent. That would be an improvement from a decline of 2.3 percent the previous month.

Meanwhile, U.S. financial markets have enjoyed a strong July, reaching several highs. The S&P 500 closed Friday at a new record of 2,175, and it was up about 3.5 percent for the month.

Bloomberg said that as of Friday about one-fourth of S&P 500 companies had issued fresh quarterly earnings reports; 82 percent exceeded profit forecasts and 60 percent beat sales expectations. About 180 companies are set to issue quarterly reports this week.

“We’ve had a major rise in global equities for almost a month; this has been accelerated during the earnings season,” Christian Gattiker, head of research at Julius Baer Group in Zurich, told Bloomberg.

“This is now a time of digesting these rises. [This week] is really a bumper in terms of earnings, so everyone is looking at that. Overall it’s been a decent earnings season so far.”

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