August is a time when many of us plan vacations with family and friends in order to reconnect. The recently released report on second quarter economic growth, as measured by gross domestic product (GDP), shows the U.S. economy is also taking the time to “reconnect” this summer, with the economy’s underlying fundamental strength reconnecting with economic growth after weather-related weakness in the first quarter.
Inflation-adjusted, or real, GDP rose at a 4.0% annualized rate in the second quarter of 2014, and revised data show GDP growth was 3.5% or higher in three of the past four quarters dating back to the third quarter of 2013. The exception was the 2.1% decline in GDP in the first quarter of 2014, which now looks even more like a weather-related outlier, resolving the disconnect between underlying economic strength and economic growth. GDP is the broadest measure of the nation’s economic output, and the report is closely watched. The data released so far for the third quarter—vehicle sales, the Institute for Supply Management (ISM) manufacturing index, initial jobless claims, and employment, among others—suggest the underlying economy also had decent momentum as the third quarter of 2014 began.
Manufacturing data corroborate the strength seen in the GDP report. The July 2014 ISM reading was 57.1, well above consensus expectation (56), and also well above 50—again, resolving a disconnect. If sustained over the final two months of the quarter, this level of ISM is consistent with above-average GDP growth. A reading above 50 on the ISM indicates the manufacturing sector is expanding, while a reading below 50 signals the manufacturing economy is contracting.
Looking at job growth, the July 2014 Employment Situation report further resolved the disconnect and supports our view that the economy is strengthening. The economy generated 200,000 jobs or more per month over the past six months, the longest stretch of 200,000-plus monthly job gains since 1997, when the economy was growing at nearly 4.5%. As the weather normalized from the harsh winter of 2014, job growth accelerated to 260,000 per month for the four months ending in July 2014.
Some might still be concerned by the increase in the unemployment rate in July. However, while the unemployment rate rose to 6.2% in July 2014 from 6.1% in June 2014, it declined by more than a percentage point over the past yearand is nearly four percentage points below its post-financial crisis high of 10.0% in 2010.
On balance, the reports released last week and during July all but confirmed the 2.1% drop in GDP in the first quarter was an aberration due to severe weather. Looking ahead, the data in hand continue to suggest the U.S. economy is reconnecting with its fundamentals and may be poised to grow above its long-term run rate in the second half of 2014.
Right now, many of us are cherishing these precious last few weeks of summer. As you enjoy this time, I continue to believe the foundation is in place for you to make further progress toward potentially achieving your financial goals in 2014. As always, if you have questions, I encourage you to contact us.