3Q2017 Gross Domestic Product: First (“Advance”) Estimate

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In its advance (first) estimate of 3Q2017 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 +2.98% (2.5% expected), down 0.08 percentage point (PP) from 2Q2017’s +3.06%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 3Q2017 was +2.26% relative to 3Q2016; that was marginally higher (+0.05 PP) than 2Q2017’s +2.21% relative to 2Q2016.

Three of the four groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), and net exports (NetX) -- contributed to 3Q growth. Government consumption expenditures (GCE) barely contracted and thus detracted from growth. 

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The changes from 2Q reflect a general deceleration of consumer and commercial spending growth that was nearly offset by increased inventories and net exports. The contribution from consumer spending on goods dropped by 0.24 PP (to +0.92%), while spending on services shed 0.38 PP (to +0.70%). Part of the slowdown in growth of consumer spending may be attributed to real annualized household disposable income dropping by $19 to $39,280 (2009 dollars). The household savings rate also retreated by 0.4 PP, to +3.4%, the lowest level since 4Q2007.

Inventory growth was significant -- roughly a quarter of the headline total (+0.61 PP, to +0.73%). The contribution from fixed commercial investment was halved (-0.28 PP, to +0.25%). Net exports nearly doubled (+0.20 PP, to +0.41%) although exports decelerated (-0.14PP, to +0.28%) but declining imports (-$5.6 billion, nominal) made a positive contribution (+0.34 PP, to +0.12%). As mentioned above, government spending remained in a very minor contraction (+0.01 PP, to -0.02%).

The BEA's "bottom-line" real final sales of domestic product (which excludes inventories) decreased to +2.25%, down 0.69 PP from 2Q.

According to Consumer Metric Institute’s Rick Davis, “the minimal change in the quarter-to-quarter headline growth rate masks a material weakening of consumer and commercial spending growth.” His notable takeaways from this report include:

-- Consumer spending provided only 1.62% of the headline number, dropping 0.62 PP from 2Q.

-- Commercial fixed investment softened, shedding more than half of its 2Q growth.

-- Inventory growth is again distorting the headline.

-- Household disposable income took another hit. Less money was available, and less money was saved -- so that a significant portion of the already softening consumer spending came from savings, not paychecks.

“A headline number sustained by bloating inventories and diminished savings is simply not quite as healthy as it might seem at first blush,” Davis concluded.

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.