As the first full week of September begins, market participants are likely to continue to dismiss economic data showing that economic growth (as measured by real gross domestic product) returned in Q3 2009, as worries about the health of the economy in Q4 2009 and beyond persist. Due in part to the impact of the “cash for clunkers” program, the deluge of economic data due out this week for August and September is not likely to provide the market a clearer picture of the economy in Q4 and beyond. As such, we expect the economic data to largely be ignored by market participants, who will likely be more focused on the beginning of Q3 earnings pre-announcement season, a potential trade war with China, the ongoing policy wrangling in Washington, and the one year anniversary of the collapse of Lehman Brothers.
As we wrote last week, based on the data in hand for Q3 2009, the economy is on track to post a GDP growth rate that is likely to be above the upper end of our previously stated range for the second half of 2009, 2.0 to 3.0%. We continue to point out that the “consensus” is still looking for 2.0% real GDP growth in both Q3 and Q4 2009, although that number has been creeping higher (to closer to 2.5 or 3.0%) for Q3 in recent weeks.
Cash For Clunkers on the Economy
We expect the data due out this week to bring the market closer to our view on GDP growth in Q3 2009, as we expect reports on housing, manufacturing and retail sales to reveal above consensus expectations readings for August and September. The main theme of the week’s economic reports is likely to be the positive impact of the “cash for clunkers” program on the August data. The flip side of that, is that the market and the financial media are likely to spend a great deal of time this week ignoring too good data for August, and focusing on the negative implications of the end of the “cash for clunkers” program on the September data.
The price data due out this week (August PPI and CPI) will again tell the story of headline deflation but core inflation. As we head into late 2009 and early 2010, headline deflation will give way to headline inflation, due to the impact of the surge (and subsequent decline) in oil prices over the last half of 2008. However, core inflation (running at about 1.5% year-over-year now) is likely to decelerate as we head into 2010, which will give the Fed plenty of leeway to keep rates lower longer than the market now anticipates. Currently, the market is pricing in the first Fed rate hike of the cycle in March 2010. Our view is that the Fed could be on hold until the summer of 2010.
This economic report was prepared by my firm LPL Financial.
Securities offered through LPL Financial, Member FINRA/SIPC
