Second Half Growth: Coming on Strong

Back in mid-July, Intel (INTC) gave us the first glimpses of a stronger than expected Q3. They made it clear then that Q3 growth would be anything but lackluster. On Friday they underscored that assertion by further raising their Q3 outlook. Now it's likely that their strong growth will extend into Q4.

Intel also surprised in the second quarter when its sales and profit easily beat Wall Street's expectations. Not only did Intel raise sales estimates on Friday, but also signaled better profit expectations by announcing a better gross margin forecast for the quarter.

In addition to the good news wrap from Intel on Friday, this week was full of positive indications of a better than expected rest of the year...

1. Most economists forecast the government to downgrade their GDP estimates for the second quarter to -1.5%. Instead the government's revised reading on gross domestic product was unchanged from a previous estimate at -1.0% for Q2.

2. Computer maker Dell (DELL) reported earnings that easily beat analysts' estimates on Thursday. Like Intel, Dell also expects stronger sales in the second half of the year. Dell hasn't had much good news to report in the last year and many analysts use Dell results as a barometer for corporate spending in the coming months.

3. Also on Thursday, the government reported that initial and continuing claims for unemployment continued to fall. Earlier in the week the Conference Board reported that its Consumer Confidence Index skyrocketed to 54.1 in August from an upwardly-revised 47.4 in July.

4. And news on the home front was also extremely positive. In a joint report issued by the Census Bureau and Department of Housing and Urban Development, new homes sold at an annualized rate of 433,000 during July. That was up almost 10% from the rate in June and the highest rate since last September. The report comes right on the heels of earlier home market positives including spikes in existing home sales, home prices and housing purchase affordability.

5. But what is likely the best evidence of significant second half growth was a durable goods order surge in July. Those orders rose 4.9%, the largest increase in two years. Civilian aircraft orders jumped, while the reopening of Chrysler and General Motors assembly plants reflects a welcome increase in orders for motor vehicles.

Earlier in the month we warned to not be surprised by a strong Q3. It now appears that Q4 will be quite strong as well.

Comments

[The Recusant:]

Huh? Where are your reasons for optimism?
Point-by-point:
1. A poor and unchanged GDP forecast is no reason for expecting better growth, especially when it is a negative percentage.
2. Dell, like most other retailers have cut to the bone to achieve better quarterly reports. There is only bone left for the next quarterly.
3. Unemployment during the summer months is traditionally the peak, but an unemployment rate officially approaching 10% is a bleak indicator of employment in sectors other than construction.
4. Rock bottom pricing on homes for first time home owners is the reason for those increased home sales. The value of homes decline further and the banks, owners, and economy suffers more.
5. Companies replenishing depleted inventories do not a growth in production make. Nor does the Cash-for-Clunkers stimulus provide for a lasting increase in sales for auto makers.

Nice try, but I'm not convinced by your arguments.

Aug 30 04:21 PM

[The Good Ne...:]

Recusant,

1. The point is that most economists had forecast a downward revision. Again they were wrong. Q2 numbers were better than expected. As recovery began, many touted a lackluster Q3 and Q4. But a much stronger Q3 and Q4 now appears highly likely.

2. The good news at Dell are not only better margins from cost cutting, but a forecast for a strong second half sales. That is likely a barometer for increased corporate spending. Hundreds of new jobs are now available at Dell and posted on their corporate jobs board.

3. 10% is in the rear-view mirror with respect to unemployment. Much more corporate hiring is now occurring vs. layoffs.

4. There is much more going on in the housing market than first time home buyers. Investors are also swarming in with cash... returns on rental business is at an all time high. Like all housing rebounds we are now seeing price increases moving up market.

5. Have a look at our historical watch of the ISM manufacturing index since the beginning of the year. Also watch it closely on Tuesday to see a manufacturing sector that is now growing again. It has been since June with or without Clunkermania.

Nice repartee, but I'm not moved by your rebuttal.

Aug 30 06:31 PM

[Old Trader:]

" When all your read is gloom and doom, turn to "The Good News Economist" for a whole different perspective.
Visit goodnewseconomist.com »"

A bottle of Wild Turkey has the same effect on me, while causing less damage to my portfolio, although the liver doesn't like it so much...

Aug 30 07:15 PM

[The Recusant:]

Your retort would be valid except that:
1. Q3, because of cost cutting or cyclical sales, will look like an improvement from the previous quarter. Even Q4 might show increased sales due to exports from the decreased value of the U.S. dollar. Neither are an indication that the system is in recovery. That will take until the year's end to discern.
2. Back-to-school sales may make a blip in sales for Dell, as well as for all the other associated products companies, but employment is still contracting according to all reports.
3. Perhaps a few companies are rehiring, but what levels of employment are they rehiring? Far too many professionals and skilled employees are out of work and continue to be forced into underpaid or unrelated jobs. The actual unemployment, much closer to 16-18%, underlies a snowballing effect that will soon hit the financial sectors with more mortgage defaults and a credit card crisis.
4. The small and weak increase in home sales, purchased by first time buyers and speculative "flip" buyers, does not even-out the cost of defaulted home mortgages. Rentals are skyrocketing because people must now rent instead of own. Commercial businesses are the next large mortgage sector to begin defaulting in Q4.
5. As for the July ISM manufacturing index, it also showed inventories at a stand still that indicates manufacturers and their customers have no confidence in future sales increases. Additionally, it reports that the manufacturing sector overall is contracting and slowing.

Still a no-go.

Aug 30 09:00 PM