3rd Quarter GDP, September Pending Home Sales and Weekly Jobless Claims

KEY DATA:  GDP: +2%; Durable Goods Consumption: -26.2%; Consumer Inflation: +5.3%; Ex-Food and Energy: +4.5%/ Pending Sales: -2.3%/ Claims: -10,000

IN A NUTSHELL: “If you don’t build it, they cannot buy it, so it cannot be argued that the slower summer growth rate reflects a weakening economy.”

WHAT IT MEANS:  Economic growth took a hit in the third quarter, as GDP expanded by what would normally be called trend growth.  But when you have had four consecutive quarters of 4.5% or more growth, 2% looks tepid.  The details, though, correctly describe the situation.  The biggest problem was a massive drop in vehicle purchases, which took 2.4 percentage points out of growth.  We knew that had happened and why: There was little inventory to buy.  The demand is there, the supply isn’t. That is not a sign of weakness.  There was a major widening in the trade deficit, which was mostly due to a rise in imported services. Goods imports were still constrained by the port backups.  Goods exports declined, possibly for the same reason.  On the business side, investment rose modestly, while housing construction declined, slowing growth.  As for the government, while state and local governments spent like crazy, the federal government didn’t, with the result being largely a wash.  The one biggest addition to growth was a massive rebuilding of inventories.  That was needed given the huge drawdowns we saw in the previous two quarters.  Finally, the numbers on inflation were as ugly as expected, with or without food and energy included. 

Housing sales have been restrained by a lack of supply, but that could be changing.  The National Association of Realtors reported that pending home sales declined, in September, though that is not as troubling as it might seem. There was a huge pop in the index in August and the current level is high.  The trend over the past two months is up sharply from the February through July numbers, so it would not be surprising to see closings rise over the next few months.

New unemployment claims fell again last week.  The level may not be near the historic lows we saw before the pandemic hit, but they are pretty low on an historical basis.  Given the massive number of job openings, look for claims to continue declining for some time.  And look for the labor market to remain drum tight.    

IMPLICATIONS:  Without perspective, the data provide little information.  When it comes to analyzing the daily economic reports, that has been my overarching philosophy.  If you put the GDP numbers into perspective, it is clear the moderation in the headline growth number does not reflect a weakening economy.  The massive decline in durable goods spending was basically the result of a lack of vehicles on the lots.  And that was largely due to a problem with the supply of microchips which has restrained production.  Demand remains strong, but there is little to purchase.  That is slowly changing, so expect consumer spending to be a lot better in the current quarter.  A key sign of that happening is the massive spending on services. People are buying things for themselves, and they will back it up with big-ticket purchases once there are items to spend it on. So, look for a rebound in growth in the fourth quarter.  How big a jump is unclear as it is hard to know how fast production can expand given the continuing supply chain snafus.  The backlogs at the ports just keeps growing.  Pent-up demand continues to build, and it will likely power solid growth at least through the first half of next year.  I suspect that is how the Fed’s will view things when the FOMC meets next Tuesday and Wednesday.  Today’s GDP report should not stay the Fed from completing its appointed round of asset purchase tapering.