I have not been writing about macroeconomic data for four weeks. Therefore, it is time to review the most important US releases! We could recently observe that a revival in economical activity is materializing. The focus of interest remains on global demand conditions and on a recovery led by the US, where lax monetary policy and aggressive fiscal stimulus make stronger growth likely. The biggest challenges lie in improving job market conditions and managing long interest rates, which matter for the economy much more than the rates at the short end.

At first glance the second quarter GDP figures were much stronger than expected (2.4% vs. expected 1.5%). When analyzing in detail the composition we recognize government spending as one of the main drivers, while real personal consumption was in line. Given the approved tax cuts, consumer spending however is likely to pick up in the third quarter.

An encouraging signal came in from the business investment side, (plus 6.9%), with software and equipment spending posting the highest increase. While prices do not seem to be an issue at the moment, net trade and inventories growth contributed negatively to GDP.

With US growth set to spill over outside the US, foreign demand should accelerate and both inventories and net trade should have a more favorable effect for the third quarter GDP growth.

The ISM manufacturing surpassed the important mark of 50 points with a July reading of 51.8, suggesting an expansion in the manufacturing sector. Looking at the details, the new orders and the production subcomponents increased, while the employment index slipped somewhat.

The key message is that there are strong signals that the manufacturing business is picking up in the third quarter, but labor market continues to remain weak. The strength in manufacturing was also confirmed by the improving factory orders for capital goods, generally an encouraging sign for the capital spending outlook.

Labor productivity posted an increase of 5.7% compared to the previous quarter. This was due to declining unit labor costs and number of hours worked as well as to an increase in output growth.

The reading is a consequence of the strong cost control, suggests improving profit margins and acts anti inflationary. This explains the reason why the bond market reacted strongly to the productivity release, pushing down yields for all maturities and flattening the steep yield curve. The difference between 10 year and 2 year yields reached recently a peak of 270 basis points.

Interestingly, the newest data of the Conference Board consumer confidence and the University of Michigan confidence index, both indicators of private consumption, recently totally disagreed.

While the first presented a negative surprise plunging to a level of 76.6 from 83.5, the second showed clearly signs of improvement, driven by higher stock prices and the benign effect of the tax cuts.

Given the present jobless recovery, the Conference Board figure was dragged down by deteriorating perceptions on the labor market.

Generally speaking, and judging form historical time series for private consumption, it seems that the University of Michigan index is a more appropriate indicator for consumer spending. Good reason therefore to some optimism.

More important than the expected “no change” in interest rates, was the assessment of the balance of risks from the FED point of view.

The FED is wiling to tolerate an extended period of growth before raising rates because the risk of an unwelcome fall in inflation still exceeds threat of a rise in inflation. The probability of fighting deflation by creating inflation still persists. Poison for the bond market!