Unsustainable Consumer Spending Boosts Q3 GDP, Recession Odds Still Elevated
- Real Gross Domestic Product increased at a 2.5 percent annual rate in the third quarter.
- Real Consumer Spending grew at a 2.4 percent rate, while real disposable income declined.
- New Orders for Durable Goods dipped by 0.8 percent in September. Core orders gained 2.4 percent.
- Sales of New Homes increased by 5.7 percent in September to a 313,000 rate.
- Initial Claims for Unemployment Insurance for the week ending Oct. 22 fell by 2,000 to 402,000.
Third quarter GDP came in about as expected, growing at a 2.5 percent annual rate. The headline number was boosted by an unsustainable surge in consumer spending during the quarter. Real (inflation adjusted) consumer spending increased at a 2.4 percent annual rate, even as real disposable income fell and the saving rate slipped from 5.1 percent in Q2 to 4.1 percent in Q3. This gain in consumer spending, despite weak job growth and declining incomes, is simply unsustainable and suggests that a Q4 correction in consumer sales might turn out to be the Grinch that stole Christmas. Business investment popped in Q3, perhaps as a result of companies taking advantage of accelerated depreciation before its scheduled expiration at year end. Total nonresidential fixed investment increased at a 16.3 percent annual rate, the fastest growth in over a year. Exports grew more than imports in Q3, making trade a positive for the economy. Inventories were a surprising drag, increasing by only $5.4 billion ($2005). Government spending was unchanged for the quarter, held down by still-declining state and local government spending and falling nondefense federal spending. President Obama’s decision to redeploy U.S. troops out of Iraq will be a boost to Q4 defense spending. Despite moderately strong GDP growth in Q3, odds of recession for the U.S. before the end of 2012 remain elevated. The economy is growing, but key sectors are not recovering, namely labor markets and housing. Ongoing drags to most components of government spending will persist through 2012, as will constraints to consumer spending. Unmeasurable downside risk from the Euro-zone remains in play, at least through early 2012, if not longer. The odds of a U.S. recession before the end of 2012 remain at 50 percent until job growth accelerates or Europe emerges from its new Dark Age.
New orders for durable goods fell by 0.8 percent in September as both commercial and defense aircraft orders hiccupped. A core measure of new orders, non-defense capital goods excluding aircraft, gained 2.4 percent. New home sales bounced by 5.7 percent to a 313,000 unit annual rate. We will take any gain we get, but it still looks like there are miles to go before we see a fundamental improvement in new home sales. Initial claims for unemployment insurance fell by 2,000 for the week ending October 22, but remain stubbornly above 400,000 at 402,000. No real improvement here.
Market Reaction: Equity markets opened strongly on news from Europe. Treasury yields are up. Oil is up to $92.61/barrel. The dollar is down against the yen and the euro.