GDP REPORT SHOWS MODERATE GROWTH AND MODEST INFLATION
NAPM SURVEY REVEALS WEAKNESS IN MANUFACTURING SECTOR
AND THEN . . . THERE'S THAT EMPLOYMENT REPORT TOMORROW

This morning the Commerce Department's Bureau of Economic Analysis reported that its advance estimate of the annualized increase in the Real Gross Domestic Product (GDP) for the second quarter of 1996 was 4.2 percent. GDP measures the output of goods and services produced by labor and property located in the United States and is the ultimate measure of the status of the nation's economy. Today's report revised the first quarter annualized GDP growth down from 2.2 percent to 2.0 percent.

Keep in mind that today's advance GDP estimate is just the first cut of a number of successive estimates that will be made. According to data presented in today's report, the final estimate might differ from today's estimate by from -1.1 to +1.6 percent. In other words it could fall anywhere between a gain of 3.1 percent and a gain of 5.8 percent. The first quarter annualized change in the GDP provides a good example of this process of successive estimation. From the advance estimate back in early May to today's revised number, the Q1 GDP estimate dropped from 2.8 percent to 2.0 percent.

For the four most-recent quarters the annualized growth in GDP averaged a little less than 2.6 percent. This compares with annual gains of 2.3 percent, 3.5 percent, and 2.0 percent in 1993, 1994 and 1995. So, even though the current Q2 estimate was a bit high, the average gain over the past twelve months was not unusual.

Not reported in the popular financial media today was the price index for gross domestic purchases. This is a measure of the prices paid by U.S. residents. In other words, it is an inflation indicator. The Q2 change in this index was 2.1 percent. The average change in the index over the four most-recent quarters was 2.2 percent. This compares with 1993, 1994, and 1995 annual changes of 2.6, 2.3, and 2.5 percent.

Altogether, today's GDP report presents a picture of moderate economic growth coupled with an inflation rate that is lower than any reading for the last three years.

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In his recent testimony before Congress, Fed chairman Greenspan predicted that economic activity would fall off in the second half of the year. Well, today's news release from the National Association of Purchasing Management (NAPM) seems to confirm that prediction. The NAPM today announced the results of its July member survey. The Association combines the answers to survey questions on several different facets of the manufacturing process to generate its Purchasing Managers' Index (PMI). From June to July the PMI dropped from 54.3 to 50.2. This indicates that during July the level of economic activity among manufacturers slowed to a virtual standstill. Among the measures of activity that declined during July were: prices paid (a measure of inflation), employment, new orders, and inventories.

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The GDP and NAPM reports provided further evidence to the markets that inflation was indeed in check and that the Fed wouldn't be raising short term interest rates any time soon. Both the bond market and the stock market headed higher right after the NAPM report came out and held onto most of their gains all day. The 30-year T-bond rose another 1 1/2 points to bring the yield to 6.84 percent. That compares with a near-term high of 7.09 percent just three days ago. The DJIA closed the day with another big gain -- up almost 66 points.

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That was the good news. Now the not-so-good news. The Labor Department reported today that new claims for state unemployment insurance dropped by 29,000 during the week ending July 27. This was hard on the heels of drop of 45,000 in the preceding week. This brought the level of new weekly jobless claims down to 292,000 -- the lowest level since February of 1989. The more-smoothly-varying four-week moving average of weekly claims, one of the eleven components of the Composite Index of Leading Economic Indicators, dropped to 337,500 -- well below the relative low of 345,750 set nine weeks ago. So, in just two weeks, the moving average indicator wiped out a seven-week rally and appears to have resumed trending downward.

The big question, of course, is whether this short-term drop in unemployment claims will have any impact on the data in the July Employment Situation report due out tomorrow. Last month a rising trend in unemployment claims was associated with a month-to-month drop from 348,000 to 239,000 in newly created non-farm jobs. Will the big drop off in claims in the past two weeks translate into a larger than expected increase in non-farm payrolls tomorrow? If it does, how will the bond and stock markets respond? Will the good news on the economy thus far this week tend to soften the effect of a large increase in new jobs tomorrow? Will tomorrow's reports on factory orders and personal incomes and expenditures provide further evidence of an economic slowdown?

Everything will become clear tomorrow, right after the jobs report comes out.