GDP Beats Forecast, Economy Long Way from Recession in Q2

In its preliminary 2Q’08 GDP estimates – the Commerce Department said on Thursday, the country’s gross domestic product was revised up at an annual rate of 3.3% for the April-June period, exceeding analysts’ initial estimates of a 1.9% increase as well as economists’ forecast of a 2.7% gain. Constant dollar GDP is now up 2.2% versus a year ago.

The acceleration in real GDP growth in the 2Q’08, reflects a larger decrease in imports of 7.6% compared with a decrease of 0.8% in the 1Q’08, and an acceleration in exports of 13.2% in the second quarter, compared with an increase of 5.1% in the first, obviously – helped by a weaker dollar.

Other components contributing in the acceleration process were: personal consumption expenditures (PCE), federal government spending, nonresidential structures, and state and local government spending. The largest negative contribution however on real GDP – continues to be home building which subtracted 0.6 points from the growth rate.

The upward revision in real GDP primarily reflects upward revisions to net exports, which added 3.1 points to real GDP growth versus initial estimates of 2.4% — and to private inventory investment which subtracted 1.44 points from the 2Q’08 in real GDP.

Excluding housing, real GDP grew at a 4.0% rate in Q2 and is up 3.2% versus last year. Current Dollar GDP growth was revised up to a 4.6% versus an original estimate of 3.0%.The growth marked the economy’s best performance since the third quarter of last year, when GDP rose at a 4.8% pace.

Pessimistic assumptions and negative financial headlines are one thing, reality is another. Financial markets’ inclination has always been, that – of looking ahead, an aspect often ignored by many market participants. The fact is, the good news on the economy keeps getting ignored as the majority of traders and investors remain focused on what could go wrong in the months ahead. As we have always stressed, outside of housing and banking sector, reasonable economic stability and corporate profit growth is quite real.

Bottom line: Real GDP growth in the first half of fiscal ’08 has remained positive, as we predicted. The revised GDP number, undeniably showed an economy a long way from recession in the second quarter.

We expect a virtual repeat of the economy’s first half performance over the second half of the year. We are also projecting a better than 2.3% growth rate in Q3’08 versus 1.2% consensus.

Also Thursday, the Labor Department reported the number of newly laid off people seeking jobless benefits fell for the third straight week. Initial claims for unemployment benefits declined to a seasonally adjusted 425,000 in the week ended Aug 23, down 10,000 from the previous week.

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