With whisper numbers on this morning’s revision of second quarter GDP under 1%, the actual 1.6% number came to the delight of many bulls out there. Personal consumption was revised to a 2% increase from 1.6% which was a welcome surprise, although it came mainly from an increase in energy related spending. And voila, the stock market jumped on the news. It seems like a lot of negative news had been priced into the market.
Then at 10 a.m. this morning, Ben Bernanke took the stage in Jackson Hole to deliver a much anticipated speech detailing his economic outlook. Without repeating his previous assertion that the outlook is “unusually uncertain,” the speech contained the same tone and he even included a comment that economic projections are uncertain. He also noted that the economy would expand in the second half of the year at a very modest pace, although the labor market remains disappointing. And as a result, much to the chagrin of the bond market, he would keep the widely anticipated Quantitative Easing 2 (QE2) program in its holster for the time being. We feel that QE2 is one of the last remaining bullets in the Fed’s gun and, as Carl continues to argue, likely needs to be in the trillions and come after a breakdown in equity markets to matter at this point. The ten year bond found some resistance at a yield of 2.5% but this selloff may be temporary in the context of the possibility of QE2.
So now we turn to the 3rd Quarter. Economist David Rosenberg reminds us this morning that 3rd quarter GDP will most likely be close to 0%, and may even turn negative. The last three GDP reports were 5%, 3.7%, and 1.6%, so the trend is definitely clear and the recovery is on shaky grounds. There may be some optimism on the Street today, and it could extend into next week, but the historically worst month for equities is right around the corner. It is certainly setting up for an interesting fall.
