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By Jeremy Glaser and Robert Johnson, CFA | 08-28-2014 11:00 AM

Momentum's on the Side of the U.S. Economy

Looking past volatile trade and inventory data, we see upside for consumer and business spending in the second half, says Morningstar's Bob Johnson.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Second-quarter GDP growth was revised upwards to 4.2% from an initial reading of 4%. I'm here with Bob Johnson--he's our director of economic analysis--for a closer look.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's look at this revision first. Why was this moved upwards and is this in line with what economists were expecting?

Johnson: The 4.2% gain was versus expectations of about 3.9%. So, to your question about economists, most of them were expecting a little bit of a worse number; instead, we got a little bit of a better number.

On top of that, it was a high-quality improvement. The inventory adjustment, which is always so volatile, actually went down and business investment went up in this set of revisions on the report. This report is revised three times, and this is the middle revision.

Glaser: You've talked in the past about how this number is a little bit less reliable because of those import/export numbers, because of those inventories. You mentioned inventories were less of an impact this time. How about those export data?

Johnson: Looking at both of those items, I think that the key thing to remember is that actually they were still big contributors to GDP in total, being 1.4% and 1.3% contributors. So, that's a big chunk of that 4% right there, and those numbers were just horrific in the previous quarter, about the same amount in a negative way. So, we've just kind of gone around in circles here. So, if you put the two quarters together, the net exports and net imports and the inventory data kind of wash out of there. All they do is kind of make the numbers volatile and confuse people about where the economy really is.

Glaser: Looking past those, then, what does this report tell us about the strength of business investment, the strength of the consumer? What did we learn?

Johnson: I think the key thing there is that the consumer came back from the bad weather and looked better again and some of the health-care spending came back a little bit, which was one of the causes of the first-quarter slowness. So, the consumer remains kind of a steady-Eddie, and I'm actually thinking maybe they'll even do better; we can talk about that later. But certainly, the consumer is an important part of the story here.

Glaser: Then, how about business investment?

Johnson: I think business investment in the second half could pick up as well. Because as the consumer picks up and spends more, then businesses are going to have to follow suit. And I have a theory that businesses probably underinvested a little bit here, being a little bit afraid about what was going to happen. And now the U.S. consumer is doing relatively well, and I think businesses are going to have to follow suit.

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