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US GDP Data Bode Well For Upturn
Government revisions to second-quarter data Thursday, as well as strong growth in corporate profits, reinforced perceptions that the U.S. economy is rebounding from the deep recession.
The Commerce Department's Bureau of Economic Analysis left unchanged its earlier estimate of a 1% contraction in second-quarter gross domestic product, at an inflation-adjusted annual rate. Pretax corporate profits, which plunged in the fourth quarter and recovered in the first, rose 5.7%, unadjusted for inflation, in the second quarter from the previous quarter. Exluding adjustments for depreciation and changing inventory values, they rose 9.2%.
The details of the revisions to GDP, the value of all the goods and services produced in the U.S., set the stage for a better third quarter than analysts have been forecasting. 'The economy should enjoy something of a rebound over the next couple of quarters, as inventories are restocked and pent-up demand is released,' Paul Ashworth, senior U.S. economist at Capital Economics Ltd., wrote in a note to clients. But with timid consumers still weighing on the economy, 'that rebound will take much longer to develop into a truly sustainable recovery.'
IHS Global Insight, a forecasting firm, lifted its estimate for third-quarter GDP growth to an annual rate of 3% or more, compared with 2% initially. Morgan Stanley kept its GDP prediction steady at 4.3% growth. T. Rowe Price maintained its 2.8% growth forecast but noted 'upside risk.'
The latest data underscored that businesses' aggressive cost cutting and commitment to slashing inventories helped fuel the increase in corporate profits. Nonfarm businesses drew down inventories at a faster rate than previously estimated. That shaved 1.5 percentage points off growth, larger than the department's previously estimated 0.9 points. Small inventories are seen as a harbinger of increased production in the third and fourth quarters.
In addition, as businesses become more profitable, they are more likely to resume making investments. 'It doesn't take much of a rebound in sales to trigger a revival in corporate profits, which then stimulates a cyclical upswing in business hiring and spending,' Yardeni Research said in a note to clients.
The revision to inventories in the second-quarter GDP numbers was offset by improvements in exports, residential investment, consumer spending and government spending.
Still consumers continue to be a drag on the economy. Consumer spending fell at an inflation-adjusted annual rate of 1% in the second quarter, reflecting the weak labor market, tight credit and stagnant wages.
