1. The numbers. The economy expanded at a 2.8% annualized rate for the July through September period. This compares with a 2.5% advance during the April to June quarter. Broad-based GDP inflation came in at 1.9% for Q3. Both GDP growth and GDP inflation came in higher than the market consensus expectations, as well as ClearView’s latest projections: GDP_est = +2.4% and Prices_est = +0.9%. The biggest surprise in the Q3 figures – hence, the source of forecast error – was the fast accumulation of business inventories during Q3.
2. Sector details:
Residential investment, +14.6%;
Business fixed investment, +1.6% — equipment/software (-3.7%) and structures (+12.3%);
Inventory change (Bil. $), +$86.0B (this is a speed-up from Q2, which thus exerted a 0.8 percentage points addition to Q3 GDP growth);
Imports, +1.9% (the $11.2B decrease of the trade deficit added 0.3 percentage points to Q3 GDP growth);
Government purchases, +0.2% — federal (-1.7%) and state/local (+1.5%).
3. A tougher climb in Q4. The economy fared fairly well in Q3. The lesson here is that the economy wants to grow. It posted decent results with little support from the consumer—that’s a jobs issue. (Just think what kind of growth we would see if we were experiencing a normal pace of jobs expansion, say, 350k to 450k per month. We’ve done this repeatedly in the past.) But there are three major challenges to Q4 GDP growth. The first is jobs (and income). The October job situation (reported tomorrow) is likely to be soft—affected by the partial government shutdown.
The results for November and December (as well as succeeding months) could be adversely affected by effects of the upcoming implementation of the Affordable Care Act. The second challenge is government spending, which might have been nicked by the partial government shutdown. The third challenge is inventories, which built at a rather fast pace in Q3. If the pace of Q4 inventory accumulation slows (NOT necessarily a decline of inventories), then there will be a Q4 subtraction from GDP growth. My bet: Q4 GDP growth will be less than seen in Q3.
4. Star performers in Q3. Residential investments (i.e., housing); nonresidential structures; and exports.
5. NOT at your service. Where was the slowdown of consumer spending concentrated? NOT durable goods purchases: +7.8%. NOT even nondurable good purchases: +2.7%. The slowdown was highly concentrated in the biggest segment (by far) of consumer spending, services: +0.1%. Housing and utility services subtracted 0.28 percentage points off Q3 GDP.
6. A peek at prices. There will be additional details tomorrow in the Personal Income and Personal Consumption Expenditures report, but elevated Q3 rates of price increases were seen in nondurable consumer goods (which includes energy), at +4.5% (AR) and residential investment, at +3.0% (AR).
7. Bonus. The weekly initial claims for unemployment compensation for the week ending 11/2 receded 9k, to 336k. The 4-week moving average stepped down 9k, to 348k. The temporary surge of government workers and other affected persons resulting from the partial government shutdown are dropping out of the weekly initial claims figures. Below 350k, we are in the “green” zone for the economy—typically associated with solid economic growth AND substantial new job formation. The problem is that while employers are laying off fewer workers, they are not hiring en masse new workers, largely due to the regulatory headwinds.
NASF Economic Report – Dr. Ken Mayland