Vital Signs: Stronger Demand Should Boost Economy

The headline economic report this week will be the Commerce Dept.'s first estimate of third-quarter economic growth. Real gross domestic product is expected to have grown at a 3.1% annual rate last quarter, based on the median forecast of economists surveyed by Action Economics. GDP growth has always been something of a backward-looking number, but this time the details of the report may hold some insight into how the recovery is shaping up.

That’s because recent monthly data suggest a much more balanced breakdown of the composition of growth than economists had expected a month or two ago. That is, more growth came from demand and less from inventories. Businesses had run down their stockpiles so fast that some growth in GDP was a good bet—even if overall spending stayed flat—as companies ramped up output in order to achieve a better balance with sales.

Businesses liquidated inventories at a record annual rate of $160 billion in the second quarter. That means overall output, measured by GDP, had fallen below overall demand by that same amount. Based on the recent path of manufacturing production, companies are acting to close that gap. Factory output in the third quarter rose at a 7.7% annual rate, the largest gain in 10 years. Much of that jump reflected surging auto production, but even excluding motor vehicles and parts, manufacturing output still rose at a 3.8% rate, the fastest in 3½ years.

Stronger demand last quarter frustrated efforts to rebalance inventories. The drop in August inventories suggests another large drawdown of stockpiles last quarter, but that only raises the likelihood of continued output growth in coming quarters. Consumer spending appears to have increased at about a 3% annual rate. Strong retail sales outside of autos in August and September suggest that over half of that advance was unrelated to the cash-for-clunkers boost to car buying. Fourth-quarter consumer spending is sure to look weak, if only because of the dropoff in car sales, but the recent gains in nonauto spending raise hopes that holiday buying will not be the bust that some fear.

Last quarter's stronger demand wasn’t confined to consumers. Pickups in production and shipments of business equipment by U.S. producers, along with imports of capital goods, suggest a gain in business outlays for equipment and software, the first after six consecutive quarterly declines. Rising starts of single-family homes imply a solid increase outlays by homebuilders, the first in 3½ years. Government is sure to add some punch, and exports and imports each rose strongly, pointing to rising demand both abroad and at home.

Of course, the key to a lasting recovery will be a return to job growth that will support consumer incomes and spending. Right now, the level of private-sector payrolls is the lowest in 10 years, but that suggests businesses have been overly aggressive in cutting their payrolls. If economists’ projections for economic growth in the 3% to 4% range in the next couple of quarters is on the mark, current payroll levels may quickly prove to be unsustainably low.

Here’s the weekly calendar, from Action Economics.

  Top Economic Reports Report Date Time For Median Estimate Last Period Consumer Confidence Index Tuesday, Oct. 27 10:00 a.m. October 54.3 53.1 Durable Goods Orders Wednesday, Oct. 28 8:30 a.m. September 1.4% -2.4% New Home Sales (Millions) Wednesday, Oct. 28 10:00 a.m. September 0.441 0.429 GDP (First Report) Thursday, Oct. 29 8:30 a.m. Q3 3.1% -0.7% GDP Price Index (First Report) Thursday, Oct. 29 8:30 a.m. Q3 1.4% 0.0% Employment Cost Index Friday, Oct. 30 8:30 a.m. Q3 0.4% 0.4% Personal Income Friday, Oct. 30 8:30 a.m. September 0.1% 0.2% Personal Consumption Expenditures Friday, Oct. 30 8:30 a.m. September -0.5% 1.3% Chicago Purchasing Managers Index Friday, Oct. 30 9:45 a.m. October 48.0 46.1 Consumer Sentiment Index (Final) Friday, Oct. 30 9:55 a.m. October 71.4 69.4

  Other Reports and Events Report/ Event Date Time For Dallas Fed Survey Monday, Oct. 26 10:30 a.m. October ICSC-UBS Store Sales Tuesday, Oct. 27 7:45 a.m. Oct 18-24 Johnson Redbook Weekly Store Sales Tuesday, Oct. 27 8:55 a.m. Oct. 18-24 S&P Case Shiller Home Price Index Tuesday, Oct. 27 9:00 a.m. August Richmond Fed Survey Tuesday, Oct. 27 10:00 a.m. October Mortgage Applications Wednesday, Oct.28 7:00 a.m. Oct. 18-24 Initial Unemployment Claims Thursday, Oct. 29 8:30 a.m. Oct. 18-24 Housing Vacancies Thursday, Oct. 29 10:00 a.m. Q2 Kansas City Fed Survey Thursday, Oct. 29 11:00 a.m. October

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