The government’s first crack at second-quarter GDP hits the streets tomorrow. The crowd’s looking for an inflation-adjusted annualized rise of 3.5% in the U.S. economy for April through June, according to The Street.com. If so, that would be slower than the 3.8% posted in the first quarter. What are the chances that the pace of second-quarter economic growth surprises on the upside? Something more than zero, to judge by recent measures of the economy’s pulse.
Let’s start with yesterday’s durable goods orders, which rose 1.4% in June, the Census Bureau reports. That obliterated the consensus outlook for a one-percent decline. Also, May’s initially reported 5.5% was revised higher by the Census Bureau to a 6.4% hike.
June’s tally of new home sales was also released yesterday, and true to form of late the real estate market remains hot. Purchases of freshly minted houses rose to a record 1.374 million units last month, up from 1.321 million in May, according to the Census Bureau. The ascent is all the more impressive if you consider that June’s total is higher by nearly one-third from the end of 2002. Real estate may be an overheated bubble, but the bull-market momentum shows no sign of slowing.
Yesterday was also the release of the Federal Reserve’s so-called Beige Book, which is a summary of economic conditions in each of the 12 Federal Reserve districts. The general conclusion, the report advises, is that “economic activity continued to expand in June and early July.” The Richmond and Dallas regions reported that the rate of economic growth increased in their respective districts while the Cleveland Fed said the rate of increase in economic growth was “stronger and more balanced than in the spring,” quoting the Beige Book. Not all the news was bullish, although the New York district was the only region to report a slowdown.
This morning, the Labor Department reports that initial jobless claims rose a bit to 310,000 for the week through July 23, up from the previous week’s 303,000. Nonetheless, jobless claims in July have been running at some of the lowest levels seen in the last five years. Indeed, the statistic of employment growth is corroborated in the unemployment rate, which has been falling for two years and at 5.0%, as of June is the lowest since late 2001.
The Fed will weigh the above-mentioned numbers, and more when it convenes again on August 9 to discuss interest rates. For the moment, it doesn’t take much of an imagination to expect that another 25-basis-point hike in the Fed funds rate to 3.50% is coming. Considering the recent economic data, David Logan, an economist with Dresdner Kleinwort Wasserstein, tells the L.A. Times today:. “What it means for the Fed is that it is further evidence that the economy is on a firm footing and they can continue their steady tightening of monetary policy.”
The Fed funds futures market expects no less, and is currently pricing the August Fed funds contract at around 3.46% in early trading today. The stock market too is erring on the view that economic growth will remain robust going forward. The S&P 500 at this morning’s opening jumped to a new post-2002 high of 1240.
Life’s more complicated in the bond market, where the yield on the 10-year Treasury Note hovers around 4.2%. That’s just 30 basis points or so above the two-year Treasury’s yield. Such a thin spread is within shouting distance of triggering an inversion in the yield curve, in which short rates exceed long rates. Historically, that’s been an omen of an approaching economic slowdown, if not recession.
The fixed-income set remains insistent, if not defiant in its belief that trouble looms for the U.S. economy. How long can bonds hold out in the face of mounting evidence to the contrary? Tomorrow’s GDP report for the second quarter may provide a fresh clue.