Economic Update for 8/28

This morning, we saw the first revision to the initial estimate for 2^nd Qtr. GDP in the United States. The release showed the economy grew at a rate of 3.3% during the most recent quarter. This was above the initial estimate of 3.0% and much stronger than the actual decline of 0.5% during the first quarter. In actuality, this represents the highest level of growth since the third quarter of 2023. As we discussed in one of our earlier Economic Outlooks, the decline in GDP during  the first quarter was primarily due to a much higher level of imported goods into the country. This significant increase of imports, up 38% during the first quarter, was an attempt by corporations and individuals to beat increased import pricing being implemented by the Trump administration through their new tariff guidelines. It was obvious this level of importing goods into the U.S. was not sustainable and we saw imports decline by almost 30% during the second quarter. The Trump administration has generally used the threat of higher tariffs as a bargaining chip against those countries who are our trading partners. Not surprisingly, the President has been vey successful in negotiating more favorable trading agreements with those wishing to do business with our country. The fear of inflation, initially considered a threat from higher tariff levels, has also turned out to be not true.

One of the more overlooked aspects within the quarterly GDP reporting, are the Corporate Profit levels used to determine GDP configuration. Corporate Profits during the second quarter rose by 2.0%. This was in  sharp contrast to the significant decline of 3.3% during the previous quarter. We continue to see corporations report much better earning levels than most Wall Street forecasts during the past few weeks, as we are in this reporting cycle.

The Pricing Deflator used for GDP analysis was also significantly lower during this morning’s report as compared to the first quarter. The deflator for the second quarter was up only 2.0%, well below the 3.8% number reflected in the prior quarter. As we wrote earlier, the fear of inflation due to the introduction of higher tariffs by this administration has been shown to be overdone by a significant amount.

Given the improving economic conditions, as indicated above, our overall outlook for financial markets remains positive. This is shown by continued higher weightings in our equity positions throughout our portfolios. Also, we remain steadfast in our belief lower inflation will be recognized by the Fed and they will cut interest rates at least twice before year-end. Chairman Powell provided a more positive outlook in his speech last week in their Jackson Hole annual “get together”. The next Fed meeting is September 16-17. We are working to find attractive fixed-income holdings prior to their meeting.

Enjoy the upcoming three-day weekend as Labor Day is this Monday. Financial markets are closed and everyone can take a breath and relax.