U.S. Economy Improving

U.S. second quarter GDP was revised up last week to a 4.2% annualized rate from an initial estimate of 4.0%, suggesting the economy has bounced back nicely after the weather driven contraction of the first quarter. The underlying components of the report show strength in both consumer and business spending, which we felt were potential bright spots heading into the year.  With the job market continuing to improve, we expect the consumer to remain strong despite a slight contraction to personal spending in July.  The 8.4% gain in non-residential fixed investment is a positive indicator that businesses are beginning to take advantage of greater credit availability and large amounts of balance sheet cash.  Most economists are looking for third- and fourth-quarter growth to average 3%.  The next major event for bond investors is the September 17th Federal Open Market Committee meeting, where Fed officials will release their updated growth, employment and inflation expectations.  With the strong numbers that we have seen recently, it will be difficult for the Fed not to revise expectations up and give more detailed guidance on monetary policy normalization, which could make for interesting opportunities in the bond market.