U.S. stocks held in there very well despite the fact that even the paltry growth of the past year is melting away – the U.S. economy managed just a 1.6% real rate of growth over the 12 months ended June as the past two GDP prints averaged less than 1%.  But then again, we’ve got the Bernanke put, so traders see no reason to run for the hills as Big Ben can swoop in with more money pumping activity – beware consumer.

Financials, health care and consumer discretionary outperformed; although, these groups did close lower.  (A bit strange to watch consumer discretionary perform well on a relative basis as consumer confidence tanks and overall growth stagnates – you can’t explain these things.)  More logically, basic material an energy shares led the losses.

The middle-to-long end of the Treasury curve was on absolute fire Friday as the yield on the two-year fell six basis points to 0.36% and the 10-year yield tumbled 15 basis points to 2.79% -- prices up, yield down.

Word is we’ve got a debt deal; but do we?  The Senate’s plan passes spending cuts on to a future Congress and based upon the way House Speaker Boehner had to revise his plan Friday night in order to get it passed (adding in a balanced budget amendment vote) I’m not sure the House is going to pass this thing.  We’ll find out today.  More importantly, it’s too bad there isn’t a Congressional vote that assures economic growth, because without out it meaningful reductions in the budget deficit will not occur.

Market Activity for July 29, 2011

Sector Activity for July 29, 2011

Q2 GDP

Oh my!  The Commerce Department reported that second-quarter GDP came in at an extremely weak real annualized rate of 1.3% (expected to come at 1.8%), and the revision to Q1 got obliterated to 0.4% from the 1.9% formerly estimated – a jump in the inflation gauge helped push that real rate down along with a downwardly revised inventory number.  This makes the current situation a full-fledged growth recession – you can’t call it a recession without a couple of quarters of negative prints, but since these numbers are so far below not just normal growth but anything close to the rate it should be at this point in the cycle then growth recession is the term.

Further, what everyone has been calling an “expansion” is the wrong term.  This is still a “recovery” as due to the terrible downward revisions to not just Q1 GDP but several quarters of the past couple of years, we still have yet to surpass the prior business cycle’s GDP peak.

The chart below, courtesy of Zero Hedge, is a nice depiction regarding the enormously large downward revision to Q1 GDP.  You can see the big narrowing in the green part of the chart, which represents the inventory component.

For the latest quarter:

 * Personal consumption came in at the second-lowest reading we seen in the postwar era, outside of recession.  (You can thank the lack of job growth, household debt levels and Fed policy that has juiced commodity prices for that one.)

 * Business investment (most important segment of the total fixed investment component of GDP) was weakest we’ve seen since Q3 2009 when the recovery was just getting started, but did contribute to Q2 GDP.

 * Inventories added a scant amount to GDP in this latest quarter – and combined with the increase in the GDP inflation gauge for Q1 is what hammered the revisions as inventory building was not nearly as much as previously calculated.

 * Trade contributed the most – responsible for half of Q2 growth.

 * Government spending plunged again to weigh on growth – this is the reality we have to deal with as state and local gov’t spending had to pull back, and now we’ll have to see it at the federal level.

So what we have here is a growth situation that is virtually non-existent, even with unprecedented monetary stimulus.  (And you can’t blame it on Japan.   That supply-chain disruption was responsible for the 4.4% annualized decline in durable goods spending during Q2, but that only subtracted 0.3 percentage-point from the overall reading.  Besides, as imports from Japan fall you pick up GDP points from the net export (trade) side of the ledger – thus Japan has about zero effect on GDP.)   You can forget about strong job growth at these growth rates and you should assume that the profit cycle is getting long in the tooth as well.  Yes, we have overseas profits but Asia and Latin America can’t keep growth going with the major developed countries limping along.

Real final sales are punked – this is GDP minus inventories, which is the main measure of demand in the economy – as it has averaged 1.46% during this expansion.  This is a number that should be averaging 4%, at the least.

University of Michigan Consumer Confidence

The UofM’s gauge of consumer sentiment slid to a reading of 63.7 for July from the 71.5 in June.  This is the worst level since the 57.3 in March 2009 when the economy was technically in recession.

Both the present situation and future expectations segments of the survey eroded – current conditions fell six points to 63.7 (lowest reading since October 2009) and respondents’ outlook of their financial conditions a year out slid nine points to 56.0 (lowest since March 2009).

Chicago PMI

Despite the weakening data we’re seeing from just about every economic release, the Chicago PMI continues to hold up at pretty strong levels.  The latest reading from this gauge of manufacturing activity came in at a reading of 58.8 for July (but it did disappoint as a print of 60.0 was expected).  While this is down from the red-hot 70.1 hit in February, a reading above 50 marks expansion so more respondents are saying that factory growth continues.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900