US economy grew 3.7% in Q2

THE revised number for gross domestic product was initially reported at 2.3 per cent.

The dramatic fall in global markets over the past two days are an extension of the financial turmoil that has been brewing since China unexpectedly devalued its currency, the yuan, on August 11.

In the U.S. prior to the Chinese events, there was no indication of a slowing economy. The upward revisions to second-quarter growth also reflected the accumulation of $121.1 billion worth of inventories, up from the previous estimate of $110 billion. While the huge inventory build will likely weigh on growth in the third quarter, the blow could be softened by rebounding business investment on capital goods. On Thursday, one of China’s richest men, Wang Jianlin, chairman of property and investment firm Dalian Wanda, said China should give up the “fantasy” of 7-8 pct economic growth and accept a slower rate. But the overall story has been one of modest growth, with full-year GDP advancing from 1.5% to 2.4% each of the past four years. The ruling Communist Party has drawn much of its legitimacy in past decades from fostering economic growth and raising incomes, and wants to be seen as a responsible player in the global economy.

Even so, the data shows that the economy “despite all its volatility is still locked on the same shallow growth path that has been in place for the past several years”, said Steven Ricchiuto, chief economist at Mizuho Securities. “All the evidence from July’s activity and employment data suggests that momentum continued into the third quarter”.

And as reported in the last blog, right now the San Jose metro area is plus 60,000 jobs (6%) for the past 12 months as well as posting the second highest VC funding since the dot.com boom.

Business investment in structures and equipment was revised higher to show growth of 3.2 percent instead of a decline.

The recent wave of de-risking has been painful for markets, but for some longer-term investors, China’s fundamentals do not indicate crisis.

The U.S. was on track to raise rates as early as next month, but the problems plaguing China and rest of world may put that off. On Wednesday, president of the New York Federal Reserve William Dudley poured cold water on an imminent rate rise, though more clues could come this week when Fed policymakers gather for their annual retreat in Jackson Hole, Wyoming.

Also fueling growth were strong gains in state and local government spending, largely due to greater public construction outlays.

China’s ruling Communist Party and government are now devoting much of their attention to a massive military parade next week to commemorate the 70th anniversary of Japan’s defeat in World War II, mobilising hundreds of thousands of Beijing’s citizens in preparation. The big news in the coming months is not going to be about the Chinese economy, but really about the competence and foresightedness of the Chinese economic leadership in how successfully they can manage this inevitable transition.

Still, “the U.S. consumer is looking healthy”, Jennifer Lee, a senior economist in Toronto for BMO Capital Markets, said before the report. Now many analysts say a September rate increase is probably off the table. Dudley told reporters that the case for a Fed rate hike in September is “less compelling to me than it was a few weeks ago”, given China’s troubles, falling oil prices and weakness in emerging markets.

Concerns about a protracted slowdown in the world’s second-largest economy have been brewing for a while.