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In its first (“advance”) estimate of 3Q2016 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) pegged growth of the U.S. economy at a seasonally adjusted and annualized rate (SAAR) of +2.91%, up +1.49 percentage points from 2Q2016, and much faster than consensus expectations of 2.5%.
All groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), net exports (NetX), and government consumption expenditures (GCE) -- contributed to 3Q growth.
Most of the reported improvement in the headline number came from a +1.77% quarter-over-quarter (QoQ) gain in inventories, a +0.96% rise in exports, and a +0.39% uptick in governmental spending. Offsetting those improvements was an aggregate -1.41% reduction in the headline number from softening consumer spending on both goods and services. Fixed investments remained in contraction at a -0.09% annualized rate.
As we have indicated in the past, the BEA’s treatment of inventories can introduce noise and seriously distort the headline number over short terms -- which the BEA admits by also publishing a secondary headline that excludes the impact of inventories. The BEA’s “bottom line” real final sales of domestic product was a +2.30% growth rate, down 0.28% from 2Q2016; based on real final sales, then, economic growth actually softened during 3Q. On the other hand, 3Q2016’s year-over-year GDP growth rate was +1.50%, slightly faster than 2Q2016’s +1.28%.
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Consumer Metrics Institute noticed several cautionary items in the report:
-- Consumer spending took a major hit (it was nearly halved) in 3Q. This finding is consistent with most consumer sentiment surveys, and it is plausibly a consequence of the continued weak growth in disposable income.
-- It is possible that the “fear, uncertainty and doubt” surrounding an especially uncivil election campaign contributed to consumer sentiments and the spending malaise. If so, that trend has almost undoubtedly extended into 4Q as well.
-- Federal fiscal year-end (“use it or lose it”) spending likely is responsible for the uptick in GCE and, if consistent with prior years, could be at least partially reversed in 4Q2016.
-- Most of the QoQ improvements in the contributions to the headline number came from two especially noisy line items: inventories and exports. These line items are susceptible to significant distortions/anomalies caused by commodity price and currency swings -- even as physical quantities of inventories or export transactions are relatively unchanged.
-- It could be argued that inventory growth after five consecutive quarters of contraction was simply an overdue reversion to a zero-sum trend line. Or, alternately, they are just another indication of weakening end-consumer demand.
-- The BEA's own “bottom line” real final-sales growth metric weakened QoQ.
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.