Economic Update 10/1/26
Five Key Takeaways
The final revision to the second quarter GDP showed the economy grew at 2.2% during the quarter.
Personal Income grew by 0.2% in August and Personal Spending increased by 0.9%.
The equity market, as measured by the Dow Jones, is down about 4% for September.
Corporate Profits in the U.S. grew at a rate of 7.7% during the second quarter.
A stronger private sector is emerging in the U.S. and is less dependent on overall government spending.
Yesterday we had the final revision to the second quarter GDP, showing the economy grew at 2.2% during the quarter. This was an upward revision from the earlier 1.5% release. While down slightly from the first quarter growth of 2.5%, it still represents a relatively strong quarter. The largest positive contributors to the quarter were private investment, primarily commercial and healthcare construction, and consumer spending. I think it can be viewed in a very positive manner that government spending was not the primary factor in the growth achieved during the quarter.
PCE Index
We also saw the release of the Fed’s favorite inflation measuring indicator today. The PCE (Personal Consumption Expenditure) Index for August matched the 3.4% level of July on an annualized basis. These two months represent the lowest levels since February. The monthly release showed the PCE index rose 0.3% during August. While up from the 0.1% rise the prior month, most of the gain came from gasoline and energy cost increases. This level was actually slightly below the forecasted increase of 0.4%.
Another very positive release yesterday showed private businesses added 90,000 new employees this month, as compared to 36,000 additions last month. Not surprisingly, education and healthcare were the primary contributors to the gains in private employment. This represents the strongest month for the private sector since June. Personal Income grew by 0.2% in August and Personal Spending increased by 0.9%. Both releases again show an improving consumer sector.
Corporate Profits
One final economic indicator, and probably the most surprising, Corporate Profits in the U.S. grew at a rate of 7.7% during the second quarter. This is the largest increase for this sector in over three years.
I believe the above economic releases are showing a much stronger private sector is emerging in the U.S. and is less dependent on overall government spending. Personally, I am encouraged by such a trend beginning to occur. I think this administration’s emphasis on growing manufacturing and the production of goods and services domestically is having a very positive impact on our economy. While it will take a few more months to fully realize the benefits from such a movement, we can begin to appreciate the longer-term opportunities this is creating.
Fed Rate Increase
On a personal basis, I would like to thank those who have reached out with their support for our recent actions to reduce equity holdings prior to the Fed raising rates mid-September. The equity market, as measured by the Dow Jones, is down about 4% for September. Given ongoing concerns regarding inflation, especially the short-term impact of gasoline and diesel prices, I am expecting one more rate increase by The Fed before year-end.
We are in the process of evaluating whether we want to further reduce equity weightings given this outlook. We have also not been adding to our fixed-income holdings during this period. We have seen the yield on the 10-year treasury rise to levels not seen since 2007. This rate is currently at 5.28%. In all likelihood, we will probably begin buying fixed-income assets before adding additional equities to take advantage of the higher interest rate returns.
Hopefully everyone is adjusting to the Fall season. So far, it’s definitely cooler and wetter. I will also say the Huskers are 4-0 to start the year. I figure I had better put that out while they are still undefeated. Enjoy your upcoming weekend.
