Third quarter GDP got a hot revision higher today, up to 2.5%, from 2.0% when initially reported. The spurt beat economists' expectations too, which were set at 2.4%.
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As expected by economists and reported here in our weekly copy published Monday, one driver of GDP adjustment higher was an upward revision to exports. However, running counter to economists' views, these gains were partly offset by a downward revision to private inventory investment.
The export gains should continue, aided by the Fed's quantitative easing affect on the dollar, at least for as long as that holds. European comments by the likes of Angela Merkel, calling into question the future of the euro recently, have helped to balance currency in favor of Europe's international traders. Meanwhile, uncertainty in a rich neighborhood in Asia, threatening South Korea, and kindling too near to Japan and China, also had the dollar gaining ground Tuesday.
Looking again at the factors involved in the +0.5% adjustment to GDP, the downward revision to private inventory investment is reflective of the end of inventory restocking and a stalling American marketplace. For as long as the US economy bears the weight of close to 10% unemployment and high-teen underemployment, you can expect that situation to hold true.
What economists had not expected nor mentioned as far as we could tell, was the upward adjustments to personal consumption expenditures and state and local government spending that were seen in today's data, which helped to lift GDP growth. The price factor within PCE was unchanged, and so it was the volume of spending that was shifted higher. That's good news, but its reliability moving forward is called into question given waning consumer sentiment.
Meanwhile, strengthened state and local government spending seems improbable, and incapable of being sustained in the tax-light environment that exists today. Federal government stimulus helped in the past, but we are not sure we can expect more of that with more fiscally conscious Congressmen making the calls in DC.
Also, business investment was a key driver of third quarter growth, and that seems set to stall on more recent trouble in housing, employment, and consumer sentiment and spending.
In conclusion, we do not feel completely comfortable with the message this GDP reports seems to transmit, given the mixed data reaching the wire over the past few weeks. An environment of soft American demand for goods and services seems more realistic moving forward given housing values slipping further and the pace of home sales staggered; with stocks reconsidering valuation post the pre-election driven gains; under intensified geopolitical stresses; and while still bearing the weight of heavy unemployment. Quantitative easing has been the government's ace card in its sleeve, but today's FOMC meeting minutes release revealed a somewhat split group of decision makers. Thus, the GDP revision was well-muted by the tandem of Korean conflict and Fed fighting.
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