US Outlook Report: Ignore the Headline Q3 GDP Report Was Solid
Third quarter U.S. real GDP growth came in a touch lighter than our forecast at 1.5%, and was a big deterioration from the second quarter’s 3.9% real GDP growth, but in this instance the headline is deceiving.
Our view is that third quarter U.S. GDP was solid, nearly in-line with our expectations for a 1.6% advanced reading. The primary, and virtually only driver of the drop in growth from the second quarter, was a steep inventory correction that sliced a whopping 1.4 percentage points off the third quarter GDP growth estimate. This is merely a correction of the outsized inventory growth that occurred over the first half of 2015. Business inventories grew by $112.8 billion in the first quarter and $113.5 billion in the second quarter of this year. A three-year moving average of inventory growth shows a much more modest average quarterly growth of inventories of around $68 billion a quarter. So the drop in inventory gains in Q3 to $56.8 billion is just an adjustment to the mean and is not likely to be repeated in the quarters ahead.
Moreover, domestic demand appears strong. Real consumer spending held above three percent for the second quarter in a row, and we anticipate a similar performance from the consumer in the fourth quarter. Even business equipment spending rebounded to a respectable 5.3 percent growth rate last quarter, the fastest growth rate on this measure since last year at this time.
Indeed, final sales a measure of total expenditures that excludes inventory changes remained at a healthy 3.0 percent last quarter. Despite all the hand wringing about the strong U.S. dollar, the trade balance only deteriorated by $1.6 billion last quarter, subtracting a miniscule 0.03 percent from U.S. GDP, according to the Bureau of Economic Analysis.
Bringing it all together, the strong read on domestic demand in Thursday’s Q3 GDP report bolsters the case that growth will bounce back in the fourth quarter just in time for the Fed to go ahead with their first interest rate increase in more than eight years. Our current forecast for Q4 real GDP growth is 2.5%. At this rate, U.S. growth remains above the U.S. long-term potential and we should continue to see more tightening in the labor market and improvement in U.S. unemployment rates.
Next week, we get our first look at job growth in the fourth quarter with the release of the October payroll report on Friday. I am forecasting a solid 180K net new nonfarm jobs were created in October with the unemployment rate holding at 5.1 percent. The signals of a potential interest rate hike from the Fed as early as December in this week’s FOMC meeting statement have already helped nudge market rate expectations closer to the Fed’s projected interest rate path. If October’s payrolls come in as hot as I think they will, I expect those expectations will continue to converge.
To find out more, check out this week’s US Outlook Report.
Tags: economy, finance, job growth