There’s Good News, But It’s Still a Waiting Game

The economy received some positive news last Thursday. The second-quarter GDP surfaced at a surprisingly strong revised 3.3% growth rate, up from the previous 1.9% rate last month and well above the average economist estimate of 2.7%. The strong reading will definitely give a lift to the economy and stocks following four straight quarters of lackluster performance. Yet, at the same time and despite the strong GDP, we consider the U.S. economy to be at risk given the housing market issues, which, according to some pundits may not bottom out until some time in 2009. In the meantime, concerns in housing will cause consumers to spend less and impact GDP growth. In fact, some pundits predict that GDP will sink again in the fourth quarter, as the impact of tax rebate checks declines.

 Our feeling is that the GDP reading could be supportive in the near term for stocks, but we need to see consistent positive readings before we can get too excited and jump back into stocks with a vengeance. Our view is that the threat of slowdowns in Asia and especially China remain a key concern that could impact growth in the U.S.

 We will get more clues to the economy this week. All eyes will be on the August employment data on Friday, with estimates calling for the loss of another 70,000 jobs, which is worse than the 51,000 jobs lost in July. Other key economic data to watch for this week include the ISM Index (Tuesday), Fed’s Beige Book (Wednesday), and ISM Services (Thursday).

 Also watch oil, as it has been rising, and could again break out of its $110.00 to $120.00 trading channel, as was the case with the recent breakout to $122.00 before pulling back. High oil prices will impact consumer spending and economic growth.

 Hold tight, as this could be another week of cautious yet volatile trading and we could get a better sense of the economy and whether it is bottoming.