KEY DATA: GDP: 5.0% (revised up from 3.9%)/Consumption: +0.6%; Disposable Income; +0.3%/Durable Orders: -0.7%; Private Investment: 0.0%/New Home Sales: -1.6%
IN A NUTSHELL: “The economy boomed in the summer and while growth may have moderated during the fall, it is still moving forward solidly.”
WHAT IT MEANS: Lots of numbers today. Third quarter GDP growth was revised upward to its strongest rate in eleven years. The revision was powered by a realization that consumers spent a lot more than initially thought. There was also better business investment activity. It is nice that both households and businesses spent aggressively during the summer, but will that be sustained? Maybe not at 5%, but we could easily get another number at or above 3.5%. Consumer spending surged in November after a solid gain in October. So much for a weak Black Friday. The gains were across the board, when you adjust for price changes. So far this quarter, real consumption is rising at a 3.7% annualized pace and that could come in even higher. First, people have the money to spend. Income, adjusted for inflation and taxes, surged in November and wage and salary gains were solid. People are spending but the savings rate is fairly stable, a sign that households are not getting ahead of themselves. Second, confidence is rising. The Thompson Reuters/University of Michigan Consumer Sentiment Index rose sharply in December to its highest level in nearly eight years. Happy people make for happy shoppers.
The manufacturing sector has helped lead the way but there are questions about how strong it will be going forward. Durable goods orders fell sharply in November and that was with a pick up in civilian aircraft demand. The report was mixed. There was weakness in primary and fabricated metals, computers and defense aircraft. On the other hand, orders for computers, communications equipment and vehicles were up. Business capital investment was flat.
Housing has been moderating for a while and that trend seems to be continuing. New home sales fell, surprisingly, in November. Prices are rising, but not by much. Indeed, the 1.4% increase over the year is much less than we are seeing in the existing market. The Federal Housing Finance Agency’s October increase came in at 5% since October 2013.
MARKETS AND FED POLICY IMPLICATIONS: Patience is a virtue but it could also be an albatross around Janet Yellen’s neck. (I never worry about mixed metaphors.) The key to Fed policy is economic and wage growth and boy is it clear the economy has shifted gears. The consensus for fourth quarter growth has been about 2.5%. With the large upward revisions to third quarter growth, I am now closer to 3.5%, down from 4%, and the spending numbers support that estimate. While housing may not add much, the real uncertainty is consumers emptying shelves and causing inventories to drop. That would moderate fourth quarter growth but when warehouses are restocked in the first quarter, activity would accelerate. Regardless, the economy is in very good shape, probably better than the FOMC realized when it met and when Janet Yellen said she would be patient. The Fed may want to be patient and err on the side of too much inflation, but the strong job gains are likely to continue and lead to solid wages increases fairly soon. The FOMC may have to move earlier than most now expect. Investors should love today’s numbers but once they stop drinking the spiked eggnog, they may realize that strong growth pushes forward the time when the Fed removes the syringe from the markets. But for now, it is time to celebrate.
Have a Happy and Healthy Holiday!