Q2 GDP 2nd Revision Tame at +2.5%

WASHINGTON (MNI) - The U.S. Initial Unemployment Claims readings remain a pleasant surprise that are consistent with the labor market doing better, while the GDP data show modest on-going growth that is unlikely to cause new hiring to surge enough to alter the handles on nonfarm payrolls.

Initial Claims fell 5,000 to 305,000 for the September 21 week, resulting in a 308,000 average for September, down from 329,000 in August and 336,000 in July. This sustained lower level suggests additional labor market stability and indicates that larger advances in payrolls still are being held back by a cautious hiring situation.

But overall, the data confirm labor market improvement as the worst of the claims processing problems have dissipated.

A Labor Department analyst said there were no special factors this period and described the reading as "back to a stable number." That is because the State of California "caught up" on processing after a computer conversion delayed reporting. California is still working on its backlog in continuing claims, the analyst said, implying they might be revised or suddenly jump in future.

Continuing claims were 2.842 million in the September 14 week, the period for the employment survey, down from 2.997 million in mid-August. These are on a down-trend, but we'd urge caution in looking at the levels.

In a separate report released at the same time, the second revision to Q2 GDP was reported at +2.5%, a little lower than expected. That compares to +2.5% in the prior estimate. The details of the report, however, were better than the nondescript overall number.

Real final sales were revised to +2.1% from +1.9%, a plus.

A downward revision to inventories (some due to pricing, some in information industries) and another in exports, were offset by more consumption. This combination sets up for better growth ahead.

There was a huge up-revision to State and Local government spending (mainly in structures) for a +0.11 point better contribution. Personal Consumption also was revised better based on more healthcare spending and lower spending on recreation.

Corporate profits after adjustments now are up $66.8 billion for the period. GDP prices were +0.6%, still a modest number.

The Q2 results suggest Q3 started with leaner inventories and further momentum in buying. Sales data so far through August suggest buying continued so that the base case is for Q3 to post another modest gain in growth.

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