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On the last trading day of July, the Bureau of Economic Analysis (BEA) announced that GDP growth for the second quarter of the year was 2.4%. While this was less than the consensus estimate, I thought it was surprisingly strong. I was expecting a figure somewhat less than 2.0%. Keep in mind that this is just the BEA’s first estimate, the so-called advance estimate. A month from now it will publish a more accurate estimate. That second figure could be higher or lower than 2.4%. In any case, it is encouraging to see any amount of real economic growth taking place.

The biggest contributor to growth last quarter was private domestic investment, especially investment in equipment and software. Personal consumption expenditures were also a major contributor to GDP growth last quarter, but to a lesser extent than they were in the first quarter. However, net exports subtracted almost 2.8 points from GDP growth as the increase in imports far exceeded the increase in exports.

Government stimuli, both direct and indirect, were largely responsible for much of the growth in the second quarter. Without all those incentives, the economy would have likely dipped into a second recession. Of course, without those incentives, the budget deficit and the federal debt would not be nearly as large as they are now.

For the most part, corporate earnings reports have been strong. Unfortunately, revenues are still anemic. Companies are doing an excellent job of cutting costs, but headcount is one of those costs. Until they are absolutely convinced that sales will grow steadily, corporate managers are not going to resume hiring. In the meantime, corporations are piling up large amounts of cash. This bodes well for those hoping for dividend increases. Many companies are also taking advantage of almost unbelievably low interest rates by refinancing higher rate obligations. They view this interest rate environment as a once-in-a-lifetime opportunity.

The same holds true for mortgages. With sales and prices down, this is a great time to finance the purchase of a house with a long-term mortgage—at least for those who can get approved. The national average for a 30-year fixed-rate mortgage is about 4.5%. Five years ago home prices and interest rates were much higher, but back then, just about anybody could get approved for a mortgage. Today, prices and rates are way down, yet lending standards have been tightened. If lenders had been this diligent in the years leading up to the housing bubble, we would not be in this mess to begin with.

In the meantime, the S&P 500 keeps gyrating between 1,025 and 1,125, rallying whenever there is a hint of economic recovery and selling off on any prospect of another recession. It seems that on some days, investors can’t even decide if a particular bit of news is good or bad. Traders are making good money on the big swings. Investors, however, are getting nowhere.

I continue to believe the economy is still sick. GDP growth is being artificially generated by a large government deficit and corporations are creating profits by squeezing costs. In the meantime, home foreclosures keep rising and jobs remain scarce. While stocks could rally strongly on any given day, I see nothing yet that makes me more bullish for the long term.

Source: Don't Fall for the Rally