The US economy performed much better than anyone had expected during the second quarter of 2008. Thursday’s (August 28) report from the Commerce Department showed a 3.3 per cent annual growth rate increase in the Gross Domestic Product. This was significantly better than the previous government estimate of a 1.9 per cent increase. It was also especially impressive compared to the recent analyst forecast for growth of 2.7 per cent.

The strong report on the GDP combined with falling oil and an improved jobless claims report all drove US equities higher strongly on Thursday. It did not take long for doubters to emerge following the economic results. Many analysts were quick to predict the third quarter would not show the same firm numbers. They cited retail struggles and the dollar as reasons that GDP would likely be down at the next reporting.

The optimists in the crowd were quick to point out, however, that the GDP has been relatively outperforming predictions and estimates throughout 2008. The second quarter growth was the strongest rise since the 4.8 per cent GDP growth during the third quarter of 2007. Growth actually shrunk for the fourth quarter of 2007, but by most definitions, a recession was avoided with a .9 per cent rise in the first quarter of 2008. This was after several months of discussion about the high likelihood of recession.

The initial estimate of 1.9 per cent growth provided by the government was actually a bit disappointing at the time as early forecasts had called for 2.3 per cent growth. The 1.4 per cent gap between the initial estimates and the actual GDP caught markets by surprise, which was the leading catalyst for the day’s stock gains.

Jobless claims fell for the third straight week, according to Thursday’s announcement from the Labor Department. This helped support the notion that the economy might be working its way forward despite continued concerns about housing and credit markets. Seasonally adjusted jobless claims were 425,000, which was 10,000 fewer than last week and 2,000 better than analysts had predicted. Although most analysts say more than 400,000 jobless claims is a concern for the economy, the recent improvements bodes well.

One thing is clear with today’s data and that is that nothing is clear with the state of the economy. Data has been up and down and all over the place for several months. Equity trade has been quite volatile as have currency trade, oil prices, and other financial markets affected by the economy. Many investors in many markets have grown frustrated by the continued lack of direction from the economy. However, in the grand scheme of the economic picture, it is necessary for markets to sometimes take time to correct themselves in order to shake out bad elements (like the indiscriminate creditors).

American consumer sentiment seems to remain steadfastly hopeful. Many Americans are trying to remain conservative with spending which has been evident in recent retail data, but there does not appear to be any type of panic that has overtaken the marketplace. Retail gas prices have come up a bit off lows, but still remain well below record highs in mid-July. The dollar has held firm against major currencies and seems poised for another leg up with any substantial signs of positive economic news.

Market Recap

The Dow was strong Wednesday, with investors adding 90 points to the index. The momentum continued Thursday, thanks in large part to some surprisingly strong Gross Domestic Product and other economic data. The GDP registered a 3.3 per cent annual growth rate during the second quarter, which was well over the previous estimate of 1.9 per cent, and the analyst forecasts for 2.7 per cent. The Dow gained 212 points on Thursday, while the NASDAQ was up 29 and the S&P gained 19 points.

Neil Kokemuller
Thursday, August 28, 2008
10:10 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

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