Don't Be Surprised By Robust Growth in Q3

Last week saw another string of surprisingly good news. And Monday kicked off another week of robust economic data.

Late last week the advance estimate for Q2 GDP gave more evidence to our claim that the US economy as a whole began its return to GDP growth in June. The economy contracted in the second quarter by only 1.0 percent annualized. That's only a quarter of a percent point for the entire quarter.

What is extremely surprising however is how strongly growth is returning. Early in the year we were observing data that pointed to the manufacturing sector returning to growth by Q4. Based on the ISM manufacturing data released on Monday, it now appears that manufacturing growth is bouncing significantly and a return to overall manufacturing growth is likely in a few weeks, not next quarter. The ISM July composite index jumped to 48.9 from June's reading of 44.8. That is it's highest level since August of last year and a significant jump above the trend line that we've been tracking since March. Remember that according to the ISM correlation models an index reading a reading above 50 percent indicates that the manufacturing economy is generally expanding. A reading below 50 percent indicates that it is generally declining. But perhaps more importantly a reading in excess of 41.2 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding. We are no doubt past that 41.2 threshold. (see chart below)


Additionally Q2 earnings continue to surprise to the upside. And in significant manufacturing news, the government's clunkermania campaign has started yielding tangible sales results. On Monday, Ford reported its first monthly U.S. sales increase in nearly two years and other major automakers said sales are showing signs of stability.

Okay, let's recap. New home sales are rising with prices seeming to stabilizing (but rising in many markets), our big banks are turning profits again, the car industry sees signs of stability, manufacturing orders have spiked, and Q2 GDP only contracted by a quarter of a percentage point.

No wonder investor confidence surged to a five year high.