Not Me! Over Dramatizing Maybe, but Not Hyper- ventilating
Your favorite old hyperventilating blogger has been quite busy lately, formulating the great idea that will save the economy. That said, we ran over on publishing this tally of Q3 GDP, that if you haven't seen yet, is worth your while.
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Real GDP was reported last week for the third quarter, but it came in as expected and offered neither reason to buy nor sell heading into this week's elections and Fed meeting. Gross Domestic Product increased 2.0% in Q3, right in line with the views of economists surveyed by Bloomberg, though up only slightly from the 1.7% growth reported in Q2. Now this was the "advance" estimate, and is subject to decent sized revision, given much of the determinant data has yet to be recorded.
The drivers of GDP growth were found in personal consumption expenditures (PCE), private inventory investment, nonresidential fixed investment, federal government spending, and exports; these factors were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
In the recent past, we have been critical of our nation's economic drivers here, since they have been dominated by government stimulus and interest rate actions, and not by real and natural economic activity. This quarter we show consumption pickup to 2.6%, versus a rate of 2.2% in Q2. That was a good thing to see, but not steady nor sure.
Growth was driven by a gain in motor vehicle sales for one. Bloomberg's Tom Keene, whom I listen to each morning and appreciate much for his insight, delivery and especially his considerate character (never a negative tone or note from Tom), said autos are in stealth recovery (something like that). He is right, as motor vehicle output added 0.42 of a percentage point to the Q3 change, compared with a 0.06 subtraction to Q2 GDP. At the same time, I see auto sales still well short of pre-recession levels, and I am not sure I would be buying into GM's IPO just yet (let's see how they want to price it).
Durable Goods again were a positive for the economy, though the 6.1% increase in spending was less than Q2's 6.8% gain; the contribution to GDP was not as spectacular as this number implies either. Americans are not going to buy washing machines for homes just lost, nor will a jobless man afford one to replace the old clunker that still works.
The rate of increase in nondurable goods spending also softened, to +1.3%, short of the 1.9% increase in Q2. Thus, the quarter's warnings seen in consumer confidence figures and other data proved true to the bottom line. But the difference was made up for elsewhere.
Services dominate American production, and the line item improved to 2.5% growth, up from Q2's 1.6% increase. I wonder, however, how much benefit this got from the fraudulent foreclosure crusaders, who instead of helping troubled households, put them to the streets. Also, the census workers fit the services bill, but were captured in government spending contribution, which was significant this quarter. I know debt collectors are working hard busting the balls of the broken down, so maybe they made up some of the gain too. I guess it's better than joining the unemployment line, but the legal hawks are just ruthless characters, or so I hear.
The small acceleration in real GDP in the third quarter (+ three-tenths) primarily reflected a sharp deceleration in import growth and accelerations in private inventory investment and in PCE that were partly offset by a downturn in residential fixed investment and decelerations in nonresidential fixed investment and in exports (I know that's a run-on sentence, but it's right off the report - you don't need a GED to work for the government it seems). In any event, this mess of a sentence is not good news for you. If import growth is down, then Americans are buying less of even the cheap stuff.
Inventories keep rising (fastest since 1998), but as my favorite columnist, Barron's Alan Abelson noted, it is while final demand slumps (+0.6% last quarter). Perhaps we are stocking up just in time to put everything on special sale (read bankruptcy driven inventory unload). Are you Christmas shopping this year? Where from? How have things changed?
I hope I'm included in the group of "hyperventilating, wild-eyed bloggers…" Alan mentioned in his column this week (a must read; it makes the $5 spend for Barron's worthwhile on its own). Hey, I shared a few drinks with a Barron's scribe this weekend too, and a Golden Globe Award winner as well (I've uttered those words about a hundred times since). It just rolls off the tongue nicely. See my Facebook page for details and a photo soon, and join if you are not a "friend" yet.
I believe I need not harp on housing here again, given last week's overwhelming coverage of the sector. To summarize, it still sucks. The pace of growth in both exports and imports moderated, offering perhaps an omen for the global economic outlook. Barron's got it right though, the key to Q3 was the buildup in inventory, as it contributed 1.44 percentage points to the third quarter change. If this stuff they filled the warehouses with doesn't sell, then the economic factor will be removed in ugly fashion in the quarters ahead. Do you think ugly enough for recession?
While investment in equipment and software contributed 0.8 to GDP, that was down from a 1.52 percentage point contribution in Q2. You'll recall that not too long ago, every strategist hoping for a bonus was playing up the business investment numbers. However, we were attributing them to big cash on balance sheets and a need to replace aged equipment (just see our "Interesting Reads" section at the blog.
Most economists seem to agree with our view that economic demand is null and void, and many of us are also not expecting much from the remaining Fed arsenal (read QE2). It really is going to take innovative thinking to revive and restore the economy, but don't you worry, your loyal hyperventilating blogger is working on something of that sort to save us all (if anyone in DC will have a hear).
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