Category Archives: Gross Domestic Product

Durable Goods Orders, Economic Indicators, Gross Domestic Product, Income and Spending, New Home Sales

Revised Third Quarter GDP, November Spending, Income, Durable Goods Orders and New Home Sales

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!

Consumer Sentiment, Economic Indicators, Gross Domestic Product

Revised Third Quarter GDP and November Consumer Confidence

KEY DATA: GDP: 3.9% (up from 3.5%); Year-over-Year: 2.4%; Corporate Profits: +2.1%/Consumer Confidence: down 5.4 points

IN A NUTSHELL:   “The economy really is growing solidly, which makes the decline in confidence very strange.”

WHAT IT MEANS:  Is the economy accelerating?  It sure looks that way.  The upward revision to the summer economic performance was a surprise, but it was not caused by anything that could be considered strange.  Both consumer and business spending was a bit better, but the changes were not large.  Similarly, government spending was cut, but also by a modest amount.  The trade deficit turned out to be wider than initially thought but businesses stocked up for the holiday shopping season at a greater pace, offsetting the negative impact of trade on growth.  All-in-all, the changes came in all the right places.  Inflation remained in check, which was expected, but there was a downgrade to personal income growth.  That is not good news for employees.  Corporate profits rose at a modest rate as well. 

Meanwhile, in the face of declining gasoline prices, improving economic activity, strong job gains and a lower unemployment rate, consumers suddenly turned sullen.  The Conference Board’s Consumer Confidence Index dropped sharply in November after having risen solidly in October.  There was an especially large decline in expectations as the labor market outlook seemed to dim.  These results were quite a surprise and given all the positive economic news, are hard to explain. 

Meanwhile, the slowdown in home price appreciation continued in September. The S&P/Case-Shiller national index fell slightly and the year-over-year gain came down again. It is hardly a surprise that the huge increases we had been seeing have disappeared but it is disturbing that we are not seeing some continued monthly gains.

MARKETS AND FED POLICY IMPLICATIONS: If the consumer confidence numbers had come in as expected, I would be talking about the economy being off to the races.  But the sharp decline does raise some questions, though I am not sure what they are.  Basically, there is every reason but one to believe that people should be feeling better about things.  That reason is wages, or lack thereof.  Nothing else should be standing in the way of this economy really picking up steam.  But businesses have done a great job of keeping worker demands for higher wages at bay and until the pendulum swings back to employees, firms will continue limiting pay increases to their workforces.  The Fed members are likely to take these reports in stride, as they really do not change anything.  But investors have to start wondering what shoppers are really thinking.  I believe this will be a really solid holiday season, but we need happy consumers for that to happen. 

Economic Indicators, Gross Domestic Product, Weekly Jobless Claims

Third Quarter GDP and Weekly Jobless Claims

KEY DATA: GDP: +3.5%; Consumption: +1.8%/Jobless Claims: 287,000 (up 3,000)

IN A NUTSHELL:   “The economy just may have shifted gears before anyone expected and the firming in the labor market provides hope the strong growth can continue.”

WHAT IT MEANS:  I have been arguing for a while now that the underlying economic fundamentals are improving rapidly and the economy should be shifting into higher gear soon.  That shift may be taking place already.  Economic activity expanded by a better than expected pace in the third quarter and the report was not filled with too many head-scratchers.  Consumer spending remains disappointing and the weak link is still services.  Of course, this is the biggest individual component of GDP, accounting for two-thirds of consumption and 45% of all economic activity.  It is hard to grow rapidly if people don’t purchase things like housing, utilities, medical care or recreation services at a decent pace.  So, where did growth come from?  Business investment was solid, growing at sustainable paces for equipment, structures and technology.  The housing market improved, though residential investment was nothing spectacular.  We shipped a ton of goods overseas while cutting back on our demand for foreign products.  Major reductions in oil imports are really a great boon to growth as we are keeping an awful lot of money in the U.S.  The government is back in the spending business with national defense leading the way.  That was probably make-up for all the cuts made earlier in the fiscal year.  But nondefense purchases rose as well and state and local governments continue to translate growing revenues into increasing spending.  Inflation remains muted and actually decelerated fairly sharply.  I suspect the Fed members were not pleased to see that.

One reason I am so optimistic about the economy is my view that the labor market has already tightened and stronger wage gains are in sight.  While jobless claims edged up last week, the level remains extremely low and it really does look like the October jobs report could be better than the September one, which we all agree was quite good.

MARKETS AND FED POLICY IMPLICATIONS: The Fed ended quantitative easing yesterday, pointing to improving economic and labor market conditions.  What could encourage the FOMC to start raising rates in the spring, as I expect, is continued strong economic growth, which leads to really tight labor markets.  With consumer confidence rising, falling gasoline prices creating fatter wallets, job gains accelerating, unemployment declining and incomes rising, the holiday shopping season is setting up nicely.  The National Retail Federation expects demand to rise by 4.1% this season, up from 3.1% last year.  I think that may be conservative.  I am in the 5% range.  That could lead to a rise in fourth quarter consumption, powering growth back to the 4% range.  A string of 3% or more growth rates, which the Fed will likely be staring at when it meets in January, coupled with an unemployment rate closing in on the 5.5% full employment rate, should be enough for most Fed members to throw in the towel.  Investors will have to start balancing the reality of rate hikes in the first half of next year with better growth.  We will find out then if it was the Fed or the economy that generated the outsized equity market gains over the past few years.

Economic Indicators, Gross Domestic Product, Weekly Jobless Claims

July Pending Home Sales, Revised Second Quarter GDP and Weekly Jobless Claims

KEY DATA: Pending Sales: +3.3%; Year-over-Year: -2.1%/ GDP: 4.2% (from 4.0%); Corporate Profits: +8.0%/ Claims: 298,000 (down 1,000)

IN A NUTSHELL: “If the housing market really is getting better, then there are every reasons to believe the strong growth seen in the second quarter can be repeated.”

WHAT IT MEANS: Housing took a big hit in the winter and the spring was better but not great.  However, it appears that conditions are beginning to really improve.  We saw that existing home sales hit their highest sales pace this year in July, housing starts surged and builder Confidence continued to pick up. Today’s report showing pending home sales increasing just added to the impression that housing has thrown off its winter-induced lethargy.  While these are contracts not closings, they do point to more home sales ahead.  Granted, the level is still slightly below what we saw in July 2013, but they are coming back nicely.  The only recent negative housing report was new home sales and that looks like an aberration. Developers don’t develop and builders’ confidence doesn’t rise if demand is weak.

In other reports, the economy grew even more strongly than initially estimated and the robust increase in activity led to a jump in corporate profits.  The good news is that firms are using some of the money to invest in equipment, software and even new plants.  What they are still not doing is paying their workers more and they will continue to do that as long as they can get away with it.  But the time to pony up may be getting near.  Unemployment claims eased last week and seem to be settling into a range that puts it at the lowest in history if you adjust for the size of the workforce.  The level points to a potentially very strong August employment report, which we get at the end of next week.  I would not be surprised if job gains around 275,000 and we could even see the unemployment rate at 6%.

MARKETS AND FED POLICY IMPLICATIONS: Today was a good day for economic numbers, which should mean a good day for investors.  Of course the economy often takes second place to geopolitical concerns and the situation in Ukraine continues to be worrisome.  Vlad the Invader seems to be at it again and that is not good news.  But domestically, the economy is in good shape and getting better.  If the August employment report is as good as I believe it could be, the screeches coming from the hawks will get awfully loud.  Janet Yellen

conceded that conditions may improve faster than expected.  While a robust gain in payrolls and a drop in the unemployment rate will not likely cause the Fed Chair to come out and make that admission just yet, it will likely give her pause.  The interesting question is how will investors react to the Fed moving closer to hiking rates?  Since tightening will only come when Chair Yellen and her band of merry low-raters think the economy is really strong and the labor market is becoming an issue, a rate hike should be viewed positively.  But that is just an economist talking.

ADP Payroll Estimate, Economic Indicators, Gross Domestic Product

Second Quarter GDP and July ADP Jobs Forecast

KEY DATA: GDP: +4.0%; Consumption: +2.5%; Consumer Prices: +2.3%/ADP: 218,000

IN A NUTSHELL:  “The strong second quarter growth supports continued solid payroll gains and a further tightening of the labor market.”

WHAT IT MEANS: The Fed is meeting and the members now know that the winter of our discontented economy is past.  Economic growth had declined sharply in the first quarter, though the latest estimate of 2.1% was not as ugly as the previous 2.9% guess.  Still, that size fall in activity raised questions about the true strength of the economy, an issue that is no longer a concern.   Growth rebounded sharply in the spring, led by strong vehicle sales, solid export activity, strong business investment and inventory building and renewed government spending at the state and local government sectors.  In other words, only the federal government remains a weight around the economy’s neck.  On the inflation front, consumer costs accelerated, rising at the fastest pace in three years.  The pace was not great but at 2.3%, it is above the Fed’s target of 2%.  Excluding food and energy it was right at the number.

Friday we get the July jobs report and ADP expects it to come in a little lower than the June gain.  The economy probably still averaged at least 250,000 new jobs over the past two months and that is strong.  The moderation in hiring, if you can call it that, was largely in the small business component.  Payrolls rose by about 40,000 less in this component than in June.  That doesn’t worry me since Paychex/HIS reported yesterday that small businesses were adding jobs faster, so that slowing may unwind in August.  Still, the increases appear to be across all industry segments.  Consensus is for about 230,000 new positions which should support a drop in the unemployment rate to 6.0%.  I think job gains could be a touch better, closer to 250,000.

 

MARKETS AND FED POLICY IMPLICATIONS:  This report was much higher than most expected (I was at 4.1%).  It should also put to rest the questions about the rebound from the winter.  The economy came back and even though there may have been a little extra inventory building that could moderate third quarter growth, solid activity was so widespread that you cannot call this number an aberration.  We are likely to see growth in the 3.5% to 4% range during the second half of the year.  With job gains strong and the labor marketing tightening, income should begin rising faster, powering better consumer spending.  Chair Yellen is focusing on wages, but that is a lagging indicator which may lag even more because of business intransigence on raising compensation.  That is, when broad wage increases start showing up, it will be late in the process to begin dealing with the rising cost pressures.  That is a warning to both the Fed and business executives.  Either have plans in place soon to deal with the inevitable workings of supply and demand in the labor market or play catch up.  That is why I think the first rate hike comes in the first quarter of next year.  It is also time the bond markets begin focusing on the increasing likelihood that growth will be closer to my forecast, which is well above consensus, and as a consequence prices will accelerate faster than expected.  We are not talking high inflation, but inflation that exceeds Fed targets.