Economic Insights - September 2017

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Even though it’s still looks “pretty dark,” a few birds are beginning to chirp, and I think I heard a rooster crow in the distance; I believe we can safely conclude that it’s almost “morning in America, again!”

For the first time in nine years, overall real GDP grew at a 3.0 percent annual rate in the second quarter; the first full quarter of the new administration.  And, every major category of GDP, with exception of government purchases, was revised higher as well.

Stronger consumer spending and business investment in R&D coupled with small gains in most other categories pushed the revisions higher. Even better, “core” GDP, which excludes inventories, government purchases, and international trade was revised up to a 3.3 percent annual growth rate in the second quarter versus the prior report of 2.7 percent.  And, for the past two years, average growth is now up to a 2.6 percent annual rate.

Nominal GDP growth, which is “real growth” plus inflation, was revised to a 4.0 percent annual rate in the second quarter from a prior estimate of 3.6 percent.  And nominal GDP is up 3.8 percent over the past year and up at a 3.1 percent annual rate over the past two years.

These figures suggest the economy can sustain higher short-term interest rates, which is why we think the Fed will still raise rates in December, even though the markets are signaling the odds at just a one-in-three chance.

It also looks like economy-wide corporate profits in the second quarter were up 1.3 percent and were up 7.0 percent from a year earlier.  Moreover, corporate cash flow with an adjustment for inventory valuation, which is a measure of the funds companies have available to invest, hit an all-time record high.  Plugging economy-wide profits into our “capitalized profits models” suggests that, even at higher interest rates, such as a 10-year Treasury yield of 3.5 percent to 4 percent, stocks are still relatively cheap.

In other news, ADP reported that private payrolls increased 237,000 in August.

On the housing front, the Case-Shiller price index increased 0.4 percent in June and was up 5.8 percent from a year earlier. That’s an acceleration from the 4.9 percent gain in the year ending in June...

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