Friday, November 8, 2013

US GDP better...and worse...than expected

Third quarter US GDP came in at a seasonally adjusted annual rate of 2.8%, well ahead of consensus expectations of 1.8%.  But the data wasn’t as good as a cursory look at the headline result would suggest, indeed final domestic demand rose just 1.7% over the quarter.

The upside surprise came in two areas.  Inventories made a +0.8 percentage point contribution to the result.  We expect that will unwind in short order with inventories now likely to detract from growth in the fourth quarter.  Also residential investment, which rose at a +14.6% annual rate over the quarter, was much stronger than flat housing starts data over the period suggested.

The disappointment came in the more core components of GDP with both consumption and business investment coming in weaker than expected.  Consumption rose 1.5% in Q3, lower than the 1.8% recorded in Q2.  I had expected Q3 to come in at about the same level as Q2.  Business investment rose a disappointing 1.6%.  As I’ve said many times before – a sustained pickup in growth needs stronger business investment.

Net exports added to growth in the quarter, but only because the growth in imports slowed more than the growth of exports.  Declining growth in both sides of the external accounts doesn’t paint a particularly robust picture of either domestic or external demand.

This result does not portray a particularly robust picture of the economy as we headed into the government shutdown in October.  It’s on the impact of the shutdown that market interest now rests with the first significant piece of October data, non-farm payrolls, due out tonight. 

While we continue to believe the shutdown will have an only modest impact on activity the inventory build-up in Q3 has changed the likely profile of GDP growth in the second half of the year.  I was originally expecting +2.0% in Q3 followed by 2.8% in Q4.  With the 2.8% now in for Q3, I’ve shifted my Q4 forecast down to 2.0%.  That still leaves our annual average forecast for calendar 2013 at 1.7% with 2014 still expected to be stronger at 2.8% as the impact of fiscal drag wanes.