RDQ Weekly economic update

Via RDQ:

The early reports for August support our view that concerns about the economy falling back into recession are overblown.

Manufacturing activity, which has been the primary driver of the recovery, picked up steam in August according to the ISM and the employment report suggests that the Fed’s industrial production data will show a solid gain in manufactured output in the month.

Private-sector employment growth was not as anemic as expected in August and the moderate upward revisions to payrolls in June and July suggest that the job creation did not weaken as much as previously thought over the summer.

Despite the backup in jobless claims, our probit model puts the probability that the economy was in recession in August at a mere 2%.

Although GDP growth slowed in the second quarter, this reflected a surge in imports and a maturing of the inventory cycle. Final demand growth from domestic consumers and businesses grew at the fastest rate since early 2006. We expect growth to run around 3% in the second half of the year as the baton is handed from inventories to capital spending and as import growth slows.

Given our outlook on growth, we expect bond yields to back up over the balance of the year to around 3½% on ten-year Treasuries. We also look for a rally in stocks as concerns over the outlook for the economy diminish and we are sticking to our view that fair value for the S&P 500 at year-end is around 1,250.

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