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The enduring strength of the U.S. economy


By Ben Dickey


Over the last few years, the U.S. economy has grown in fits and starts, registering a bad quarter and then returning to moderate growth in the following one.

First quarter GDP growth fell 2.9%, according to the final estimate by the Bureau of Economic Analysis. Some of this weakness is due to the extremely cold weather. As the economy slowed, yields on 10-year U.S. Treasury notes moved below 2.45%. They have since rebounded to around 2.64% as of July 3.

The turmoil in the Ukraine has eased somewhat, at least in investors' eyes. However, oil prices are hovering around $103 per barrel for West Texas Intermediate as the unrest in Iraq roils the energy market.

Employment keeps moving ahead with the economy adding 288,000 jobs in June and the jobless rate falling to 6.1%. With job growth of 200,000 in most months, an additional 2,400,000 new jobs on an annual basis should help the expansion.

As a result, the household debt-service ratio as a percentage of after tax income is below 10%. This is the lowest level since the Federal Reserve began tracking this data. Most economists expect second quarter GDP growth in the 2.5% range. So far, Congress has not threatened to have an impasse over raising the debt ceiling or to shut down the government.

The overall optimism is aided by other positive numbers. The Institute of Supply Management's June PMI reading came in at 56, down slightly from the previous month. Anything above 50 indicates expansion. Inventories held steady at 53.

If the economy keeps growing, manufacturers will need to add to inventories to keep pace. Other indicators also point to expansion. New car sales rose in June to a yearly average of 16.98 million units. This is the highest level since 2006. The Conference Board reported that the Leading Economic Index rose 0.5%. This is the fourth month in a row for the increase.

These are forward-looking indicators which should point to further expansion. As we finish the second quarter, rail volumes are up much stronger than previous estimates. Along the same line, an index that tracks trucking volumes reached the highest level since 2007.

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