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Investing Specialists

Some Problems Won't Go Away

Global debt and policy issues are distractions from positive GDP indicators, says Morningstar's Bob Johnson.

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Though the two key data points of the week (the services PMI and the balance of trade) were highly positive, the market continued to focus on European debt issues. The lack of a direct policy response from the Federal Reserve and a jobs program announcement from President Obama that didn't contain any new or radical solutions were no help to investor confidence either. Topping off the week, Texas Instruments (TXN) reduced its revenue and earnings estimate citing broad- based weakness. This already comes on the heels of bad news from tech sector compatriots Hewlett-Packard (HPQ) and Dell (DELL).

Third-Quarter Real GDP Growth Could Easily Exceed 2.5%
Despite all the bad news, a sharp shrinkage in the trade balance, continued consumer spending, and decent capital goods shipments all point to third-quarter GDP growth in the range of 2.5%-3.0%, up "remarkably" from the second quarter's dismal 0.9% growth. This isn't based on a leap of faith that things will get better in September, but from data already available from July and August and assumes no further improvement in September. An improving services sector, as embodied in this week's ISM Non-Manufacturing Report, might help too. Rebounding auto production (from the Japanese transplants) will be a key component of the positive GDP report. Unfortunately, a lot of the positive news from the auto sector will be over by October--unless consumers meaningfully step up their auto purchases in the months ahead.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.