GDP and Other U.S. Economic Indicators Reported Today

December 23, 2014

The initial preliminary estimate of third-quarter GDP put quarterly growth at a seasonally adjusted annualized rate of 3.5%.  That calculation got revised upward to 4.6% a month ago and an 11-year high of 5.0% today.  Between the first estimate and today’s second revision, growth in real personal consumption got revised from 1.8% to 3.2%, and the growth of non-residential investment was revised from 5.5% to 8.9%.  Residential investment was revised to 3.2% from 1.8% reported in October.  There was little change made to government spending, which grew by 4.4%, contributing 0.8 percentage points to the GDP growth rate, and exports now shows a smaller gain of 4.5% versus 7.8% indicated at first.  All of the improvement shown by today’s revision was contributed by domestic final demand.  Business inventories exerted a neutral effect compared to an initially estimated 0.6-percentage point drag, and net foreign demand augmented GDP by 0.8 percentage points instead of 1.3 ppts thought originally.

The latest year-over-year growth rate is 2.7%, up from 2.3% in the year to 3Q13 and the same as the on-year pace in 3Q12.  On-year growth now understates true momentum because it embodies the 2.1% weather-related negative growth rate in the first quarter of 2014.  GDP growth over the five quarters from mid-2013 through September 2014 was 3.1%, the best running five-quarter pace since end-2004 through March 2006.  Still more impressive, if one deletes last winter’s distortion, the four-quarter growth from the combination of mid-2013 to end-2013 plus end-March to end-September of 2014 was 4.3%.  A pace that high has not been seen in a calendar year since 1999.

The acceleration of U.S. economic growth has not generated faster inflation yet, enabling the Federal Reserve to defer a likely first interest rate hike until around next June.  In today’s report on November personal income and spending, the personal consumption price deflation fell 0.2% on month and decelerated to 1.2% on year from 1.4% in October.  The core PCE deflation was unchanged on month and also experienced an on-year dip to 1.4% from 1.5.  However, personal spending rose 0.6% on month, twice as much as in October and the biggest gain in three months.  The second reading of the U. Michigan/Reuters gauge of U.S. consumer sentiment in December was revised somewhat lower but at 93.8 still 4.8 points better than November’s score and 11.8 points better than in July.

In other data news, the FHFA home price inflation rose 0.6%  on month but ticked only 0.2 percentage points higher to a benign 4.5% in October, and a 1.6% drop in new home sales to a 4-month low of 438K was another sign that housing continues to lag.  It’s doing so because potential homebuyers who lack the most impeccable credit ratings are struggling to get bank mortgages.  The Richmond Fed manufacturing index rebounded just 3 points to a reading in December of +7 after dropping 16 points between October and November.  Durable goods orders posted their second 0.7% monthly decline in the past three months, with such declines sandwiched around a mere 0.3% uptick in October.  Weekly chain store sales were mixed and for the most part not stellar. 

So how are confused investors to discern upcoming Fed decisions amid the prevailing configuration of robust growth in real GDP and jobs, benign inflation, and a mix of other economic indicator trends?  One could do a lot worse than concentrate on wages.  Hourly earnings posted an encouraging 0.4% monthly rise in November, but the year-on-year increase of 2.1% was just 0.1 percentage point above what was seen in September and October.  Moreover, weekly hours worked of 33.8 was unchanged in November from the previous month.  Watch wage statistics, but don’t look at a single month or even two.  Wages have been depressed for years, and Fed officials want to be confident that an upturn will endure even after Fed interest rates begin to rise.  Strengthening wage inflation is the key to a move of core price pressure back closer to the Fed’s inflation target.  The Fed funds rate will be lifted initially before the personal consumption price deflator is back at 2.0% but not before an accelerating trend in wages is firmly established.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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