GDP Data Bode Well for Upturn

Gov't revisions to 2nd-Q data, as well as strong growth in corporate profits, reinforced perceptions the U.S. economy is rebounding from the deep recession. The Commerce Dept's Bureau of Economic Analysis left unchanged its early estimate of 1% contraction in 2nd-Q GDP, at an inflation-adjusted annual rate. Pretax corporate profits, which plunged in the 4th-Q & recovered in the first, rose 5.7%, unadjusted for inflation, in the 2nd-Q from the previous quarter. Excluding adjustments for depreciation & changing inventory values, they rose 9.2%. The details of the revisions to GDP, the value of all the goods & services produced in the U.S., set the stage for a better third quarter than analysts forecast. "The economy should enjoy something of a rebound in the next couple of quarters, as inventories are restocked & pent-up demand is released," Paul Ashworth, Sr. economist at Capital Economics, wrote. But with timid consumers still weighing on the economy, that rebound will take much longer to develop in truly sustainable recovery. IHS Global Insight, forecasting firm, lifted its estimate for 3rd-Q GDP growth to an annual rate of 3% or more, compared with 2% initially. Morgan Stanley kept GDP prediction steady at 4.3% growth. T. Rowe Price maintained its 2.8% growth forecast but noted upside risk. The latest data underscored businesses' aggressive cost cutting & commitment to slashing inventories helped fuel the rise in corp profits. Nonfarm business drew down inventories at a faster rate than previously estimated. That cut 1.5% points off growth, larger than dept early estimated 0.9. Small inventories are seen as a harbinger of increased production in the 3rd & 4th-Qs. In add'n, as firms become more profitable, they're more likely to resume making investment. "It doesn't take much of a rebound in sales to trigger a revival in corp profits, which then stimulates a cyclical upswing in business hiring & spending," Yardeni Research said. Revision to inventories in the 2nd-Q GDP numbers was offset by improvements in exports, investment, consumer spending & gov spending. Still consumers continue to be a drag on the economy. Consumer spending fell at an inflation-adjusted annual rate of 1% in the 2nd-Q, reflecting the weak labor market, tight credit and stagnant wages.