The decline in U.S. gross domestic product growth in the second quarter was less than previously estimated, according to a revised report from the Bureau of Economic Analysis released on Thursday.
GDP contracted by only 0.6% in the second quarter instead of by 0.9%, as estimated in July.
In the same report, data on gross domestic income—another important indicator for the economy’s performance—increased by 1.4% in the second quarter, reaffirming our view that the economy was not in a recession in the first half of the year.
Data on corporate profits was also released, showing strong earnings growth for the private sector in the second quarter. Profits after tax with inventory and capital adjustments rose by 9.05% on an annualized basis in the second quarter, following a sharp decline of 4.93% in the previous quarter.
The number was calculated on nominal terms. But even if inflation was accounted for—running at 4.4% for core personal consumption expenditures—corporate profit growth after tax and adjustments remained robust.
With Thursday’s revised GDP report, the Fed could potentially claim a small victory over how its tightening of monetary policies has slowed the economy without dragging it into a recession.
But the work is not done yet as the labor market remains tight and wage pressure continues to be a headache.
Jobless claims
In a separate report from the Bureau of Labor Statistics released on Thursday, initial jobless claims fell by 0.8% for the week ending Aug. 20, the second decline in a row.
On top of that, the prior week’s reading was revised downward to 245,000 from 250,000. Both numbers showed a tight labor market that foreshadows another strong jobs report next Friday.
The declines in new filings for jobless claims also brought our preferred measure of jobless claims—the 13-week moving average—to moderate in recent weeks, in line with our previous forecast of a gradual climb in layoffs for the second half of the year.
Labor demand is still the main reason why layoffs have been historically low because laid-off workers can easily find new jobs.
The takeaway
With the economy continuing to show strong job gains, and with positive news coming from the most recent GDP report, we believe the Fed should remain aggressive on its rate increases. In our view, the Fed should aim for a 4% interest rate by the end of this year instead of the current 3.5% that the market is pricing in.
