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Dear Reader, |
Touch off the rockets! Light the sparklers! |
We learned yesterday morning that the gross domestic product expanded 3% in 2025's second quarter. |
The 3% posting substantially exceeded the 2.4% forecasted by a Bloomberg survey of economists. |
The president took immediately to his keyboard. He jubilated that: |
"2Q GDP JUST OUT: 3%, WAY BETTER THAN EXPECTED!" |
Trump Takes Another Shot at Powell |
The president proceeded — as a matter of course — to dig his thumbs in the blood-shot eyes of "Too Late Powell": |
""Too Late" MUST NOW LOWER THE RATE. No Inflation! Let people buy, and refinance, their homes!" |
Just so. Yet does not yesterday's report warrant further tardiness by the tardy Federal Reserve chairman? |
After all: Second-quarter gross domestic product expanded at a rollicking 3% annualized rate. |
Why the need for additional stimulus? |
The Fed Holds Steady |
In fact Mr. Powell held rates steady yesterday. Mumbled the human robot: |
Today we decided to leave our policy rate where it's been, which — where I would characterize as modestly restrictive… |
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The labor market is solid, historically low unemployment. Financial conditions are accommodative and the economy is not performing as though restrictive policy were holding it back inappropriately. |
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So it seems to me and to almost the whole committee that the economy is not performing as though restrictive policy is holding it back inappropriately and modestly restrictive policy seems appropriate. |
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A miracle of clarity! The purest crystal has nothing on it. |
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Jim Rickards: "One Executive Order changes my entire 'Birthright' thesis…"
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Sorry, Wall Street — no September Cut |
You might expect the stock market to go jumping on such superexcellent economic news. |
Yet in this particular instance you would be mistaken. |
The Dow JonesIndustrial Average took a 460-point plummet following Mr. Powell's post-announcement comments. |
Why? Because he failed to telegraph a September rate reduction. And Wall Street is hot for a September rate reduction. |
Stocks rediscovered a bit of their spirit to mount a late day surge. |
The Dow Jones Industrial Average nonetheless surrendered 171 points on the day. |
The S&P 500 yielded eight points… while the Nasdaq Composite actually scratched out a 31-point advance. |
Gold, meantime, took a $58 whaling yesterday. But to proceed… |
Did GDP Really Expand at an Annualized 3%? |
Here at Freedom Financial News, we are distrustful of numbers. |
That is because numbers can be the loveliest liars. They misinform as often as they inform. |
Let us then cast two suspicious eyes upon yesterday's economic report. |
Does the second quarter's 3% annualized expansion inform… or misinform? |
Does it represent true expansion? |
We must first recall that the first-quarter gross domestic product contracted 0.5%. |
Next you must recall that imports to the United States increased fantastically in the first quarter — by some 43%. |
That is because businesses were hoarding imported items before the president's tariffs entered force. |
You must then recognize that — in the official calculation — imports subtract from the gross domestic product: |
GDP = Consumption + Investment + Government Spending + Exports - Imports. |
Thus the blitz of first-quarter imports hauled lower the gross domestic product. |
What a Difference a Quarter Makes! |
Now consider the second quarter. |
The import dynamic nearly perfectly inverted. Second-quarter imports of consumer goods plunged 44% — the largest plunge on record. |
And from the Bureau of Economic Analysis we learn that: |
The increase in real GDP in the second quarter primarily reflected a decrease in imports, which are a subtraction in the calculation of GDP… |
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Affirms The Wall Street Journal: |
Trade alone boosted the second-quarter headline GDP number by nearly 5 percentage points, the most on record going back to 1947, as imports plunged after businesses front-loaded purchases in the first quarter. |
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Statistical Illusion |
Was the United States economy vastly more productive in the second quarter… than the first quarter? |
Or is the 3% figure a mere artifact of the gross domestic product calculation? |
Reports Rolling Out: |
The import-export dynamic essentially manufactured economic growth through accounting mechanics rather than genuine increases in productive economic activity. This statistical phenomenon makes it extremely difficult to gauge whether the economy is genuinely strengthening or simply experiencing temporary distortions. |
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I note that second-quarter private sector investment plunged 15.6%. |
Non-durable goods manufacturing decreased one full percentage point from the first-quarter. |
The number of private hires as a percentage of private employment declined to 3.6% in June — the third-lowest since its 2020 bottom. |
It presently ranges beneath 2001 recession depths. |
It's Real Final Sales That Matter |
Meantime, first-quarter real final sales expanded at 1.9%. Second-quarter real final sales expanded at a weak and wan 1.2%. |
Real final sales sketch a truer scene of economic activity than the gross domestic product. |
It irons out quarterly variations and detects statistical feints. It clarifies. |
Again, Rolling Out: |
Perhaps the most concerning indicator lies in what economists call "real final sales to private domestic purchasers," often referred to as core GDP. This measure strips away inventory fluctuations and government spending to reveal underlying private sector demand. |
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Core GDP slowed to just 1.2% annualized growth in the second quarter, representing the weakest pace since late 2022 and down from 1.9% earlier in the year. This metric suggests that genuine economic demand from consumers and businesses is actually deteriorating despite the headline growth figures. |
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The divergence between headline GDP and core demand indicates that the economy's apparent strength may be largely illusory, built on temporary inventory adjustments rather than fundamental economic vitality. This underlying weakness could become more apparent as inventory effects fade. |
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Thus yesterday's "boffo" economic report fails to animate me. |
I feel I am being taken on yet another sleigh ride. |
I do not want another sleigh ride. |
What I want is the truth. |
Brian Maher |
for Freedom Financial News |
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