Third Quarter GDP Growth Cooled as Inventories Were Drained
- Real Gross Domestic Product for 2015Q3 increased at a tepid 1.5 percent annual rate.
- Initial Claims for Unemployment Insurance were little changed at 260,000 for the week ending Oct. 24.
- The Federal Open market Committee left the door open for a December 16 interest rate hike.
As expected, the pace of third quarter real GDP growth stepped down from the strong 3.9 percent growth rate of Q2. The first estimate of real GDP growth in Q3 registered a mere 1.5 percent as the rapid inventory accumulation through the first half of 2015 proved to be unsustainable. Inventories expanded by just $62 billion (nominal) in Q3, pulling real GDP growth for the quarter down by 1.4 percent. Crude oil storage added to inventory accumulation through the first half of this year, now as storage levels out GDP growth will back down. The good news in the GDP report came from the consumer sector. Real consumer spending increased at a solid 3.2 percent rate, revved up by strong auto sales. Business fixed investment was weak again, growing at a 2.9 percent annual rate through the quarter. Oil and natural gas drilling rolls up into the structures component of business fixed investment, and that category fell at a 4.0 percent annual rate. Residential fixed investment increased at a respectable 6.1 percent annual rate, but was below the near-10 percent growth rates of the previous three quarters. Net exports were a slight drag on Q3 GDP as both import and export growth cooled. The government sector was a moderate support for Q3 GDP as the large state and local component increased at a 2.6 percent annual rate. We expect consumer spending to continue to support moderate GDP expansion into current fourth quarter. The drag from reduced oil and gas drilling on business investment will ease going forward, as will the drag from inventories. The proposed two-year federal budget deal will keep federal government spending engaged. The solid consumer sector plus ongoing house price appreciation will support state and local government. One area we are watching is trade. The stronger dollar and cooler international demand may put more pressure on U.S. exports going forward, keeping net trade in the negative column for its contribution to real GDP growth. We currently forecast a moderate bounceback to 2.4 percent real GDP growth for the current third quarter. We will update that forecast in early November.
Initial claims for unemployment insurance were essentially unchanged, ticking down slightly by 1,000, to 260,000 for the week ending October 24. Continuing claims fell by 37,000 to hit 2,144,000 for the week ending October 17. Both are good numbers.
Yesterday, the Federal Open Market Committee left the fed funds rate unchanged, but the Fed did explicitly leave the door open for a December 16 interest rate hike. We believe that the probability of a December rate hike is still below 50 percent, but that could change going forward. The Fed will see two payroll job reports, for October and November, before the next FOMC meeting over December 15th and 16th. Stronger-than-expected job growth in the absence of worse international news could tip the scales in favor of a December fed funds rate increase.
Market Reaction: Equity markets opened with losses. The 10-year Treasury bond yield is up to 2.15 percent. NYMEX crude oil is down to $45.86/barrel. Natural gas futures are very low at $2.36/mmbtu.
For a PDF version of this Comerica Economic Alert click here: GDP 10-29-15.