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A Rosy GDP Picture Shaping Up

The Unsustainable Ones

JACKSON HOLE, Wyo. -- Lots of data lately. What do they say about third-quarter

gross domestic product



index of leading economic indicators rose 0.4% in July. The

index of coincident indicators

snapped a string of 23 straight increases and held steady. Two notes here.

(1) The leading index has fallen only twice during the past seven months. This suggests very little chance of recession over the next half-year or so. (This column has previously

pointed out that the leading index has not failed to predict a business cycle peak in 50 years.)

(2) The coincident index is now rising at a 3.3% rate. This marks a notable deceleration on its second-quarter average (3.9%), and such a slowdown typically coincides with a littler GDP increase. It will probably not do so this time.

First, the

Conference Board

points out that the

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strike squished the coincident index in July, and it is sure to rebound in August. (

Industrial production

rebounded at least 0.5% last month -- we will find out exactly how much it bounced on Sept. 16.)

Second, other GDP proxies point to a bigger GDP increase than we saw during the second quarter (1.6%). Combining the index of aggregate hours (from the

employment report

) with a modest productivity assumption, for example, points to a GDP increase north of 3.0%.

Construction spending rose 0.4% in July. The increase included a 1.4% surge in new housing units. Right now -- with only one month of third-quarter data in hand -- it looks like residential investment will contribute at least half as much to GDP growth during the third quarter as it did during the second (when it added 0.6 percentage point).

And don't be surprised to see it end up helping more than that. This morning the

Mortgage Bankers Association

reported that, during the Aug. 28 week, its house-purchase index posted its biggest year-on-year gain (30.7%) in two months. Housing still has legs.

Orders for

durable goods rose 1.9% in July and are now rising at a 4.5% year-on-year rate. Orders for industrial machinery are likely to jump 13.2% during the third quarter; orders for electronics are likely to soar 35.3%; orders for computer and office equipment are likely to surge 24.9% (and this just two quarters after they zoomed 57.7% to log their biggest increase of the expansion). Shipments of nondefense capital goods are likely to rise just as much during the third quarter as they did during the second (6.6%).

This means that business investment will add something on the order of 1.4 percentage points to third-quarter GDP growth. Factory-sector inventories, meanwhile, rose 0.3% in July. This, along with the fact that the


inventory index rose in both July and August, highlights a terribly important development: Aggregate inventories fell at a $52.3 billion annual rate during the second quarter (and subtracted a whopping 2.6 percentage points from GDP growth in the process), but they could swing back as much as $49 billion (and add as many as 1.6 percentage points) during the current quarter.

August auto sales will not be finalized until tomorrow, but it looks like they will handily beat expectations for the billionth month in a row. (Spending for autos, like outlays for housing and consumption in general, is ever on the verge of slowing). And the magnitude of the August rebound -- to something in the neighborhood of 14.1 million units (annual rate) from 11.7 million in July -- will produce an August personal consumption number upwards of 1.0%. This means spending will rise as much as 3.9% during the third quarter, and that will add 2.6 percentage points to GDP growth.

The Unsustainable Ones -- the forecasters who justify their repeatedly poor results by branding everything from consumption to inventories as unsustainable again and again and again -- have been screaming that the economy is about to crash and burn for more than a year. And 58 days from now on Oct. 30, when the third-quarter GDP number is released, they will yet again push their doomsday forecasts forward another quarter. . .


Safe haven?

U.S. Treasuries

. But depending on what one thinks of the possibility of a G-7 country defaulting (or perhaps running its economy into the ground, which we now know to be possible), there may exist other (better) suitable candidates. Check out the table below.

Side Dish


is sitting on

more Treasuries -- $264.7 billion worth as of June -- than any other country. But just barely.


holds $264.1 billion worth. . . You are missing something splendid if you aren't reading

Holman Jenkins


The Wall Street Journal

every Wednesday. His writing pours as pleasantly as a 1994




! Did you hear that?!