Growth: Anticipating Yearend Cheer
By Michael Englund and Rick MacDonald
Prospects for U.S. economic growth remain notably robust, despite mixed consumer reactions to the November elections and elevated energy prices. That's the common theme that emerges from key reports released Nov. 30 on third-quarter gross domestic product (GDP), November surveys of corporate purchasing managers' view of economic conditions, and consumer confidence.
The day's first report, revised U.S. GDP figures for the third quarter, contained an upside surprise for Wall Street. Preliminary third-quarter GDP growth was bumped higher, to 3.9% (vs. economists' median forecast of 3.7%), from the previously released advance figure of 3.7%.
FROM INVENTORIES TO CONSUMPTION.
The bulk of the upward revision came from consumption, which rose to a 5.1% growth rate vs. the advance figure of 4.6%, and equipment and software, up 17.2% vs. 14.9%. Also, net exports subtracted $7.7 billion from total GDP for the quarter, well below the earlier report's $17.7 billion subtraction.
Inventories had a big downward revision, however, with the drag falling to a negative $25.2 billion from the advance figure of negative $13 billion. The larger-than-expected shifts in third-quarter growth from inventories to consumption and equipment spending suggest room for solid GDP expansion in the fourth quarter. At Action Economics, our current estimate is for a 4.5% fourth-quarter gain.
The third-quarter report also contained some good news on inflation. Price gains as gauged by the chain price index held at only 1.3% (in line with the median estimate), from 3.2% in the second quarter, despite oil prices pushing to new all-time highs. The core personal consumption expenditure, or PCE, chain price index also held steady, at 0.7% -- the lowest growth rate since 1962. Elsewhere in the report, third-quarter corporate profits dropped 2% on a quarterly basis, as a big hit related to hurricane insurance payouts damped underlying strength.
Meanwhile, data from the Chicago PMI, a regional survey of purchasing managers, were extraordinarily robust. The November index moderated to 65.2 (vs. the median forecast of 63), from October's much stronger-than-expected 68.5. Both orders and production revealed a large drop from October's elevated figures, but remain at strong levels.
The best news from the report came from the employment index, which surged to 60.8, from 54.1 in the prior month -- the highest level since August, 1988. The prices-paid component surged to 89.8, from 84.1, which marks a high since March, 1980. This jump is at odds with the sharp drop in oil prices on the month, as well as the fall evident in both the related New York and Philadelphia Federal Reserve price indexes.
The upshot: The factory sector will forge ahead in the fourth quarter, even though the other sentiment surveys are signaling expected modest pullbacks during the period.
Finally, the Conference Board's consumer confidence figures for November were disappointing -- on the surface. The headline index unexpectedly dipped to 90.5 (well below the median forecast of 96.2), from 92.9, leaving the index at its lowest reading since March.
But a closer look is in order. The headline index's weakness was concentrated solely in the expectations component, which dropped to 87.4, from 92.2. It appears that a confidence bounce in early November -- from falling oil prices, rising stock market, and reduced election uncertainty -- was short-lived.
However, the current conditions component actually improved to 95.2, from 94. We still see readings at these levels, coupled with strength in disposable income growth, as consistent with sustained solid growth in consumer spending.
Englund is chief economist, and MacDonald global director of investment research and analysis, for Action Economics
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