October ended with a treat and not a trick. U.S. equity indexes are approaching all time highs at the end of October, reversing a month-long slide that began in mid-September. The rebound in U.S. equity prices and the change in mood at month-end is supported by solid U.S. economic data and consistency at the Federal Reserve.
Third quarter GDP was stronger than we expected, with real GDP growth registering a solid 3.5 percent annualized growth rate. As usual, with the GDP report, the devil is in the details. But growth is growth, so a 3.5 percent Q3, following on the heels of a 4.6 percent Q2, makes a statement about ongoing momentum in the U.S. economy. Of note in the GDP report was stronger-than-expected federal government defense spending, which surged at a 16.0 percent annualized rate in Q3. This is clearly not sustainable, especially in light of the ongoing constraints enforced by the federal spending sequester, and strongly suggests that we will see a major pullback in federal defense spending over the next quarter or two. Real inventories settled to a normalish $62.8 billion ($2009) in Q3, dragging on growth as expected. Real consumer spending (accounting for about two-thirds of GDP) increased at an uninspired 1.8 percent annualized rate. We had forecast 1.9 percent. Net exports were also stronger than expected in Q3, supported by a surge in goods exports.
The Federal Open Market Committee took their opportunity to get out of the business of active QE, voting, as expected, Wednesday to end new purchases by today. They are still in the business of sustaining their balance sheet by reinvesting maturing assets, but we can call that passive QE. The FOMC statement contained a marginally better interpretation of labor market conditions. Fed officials looked through the price drag from lower energy prices, saying that the likelihood of inflation running persistently below 2 percent has diminished. The next step in the Fed’s pivot away from extraordinary monetary policy will be interest rate lift-off. The FOMC retained the “considerable time” forward guidance on interest rate lift-off. We still think that June is a good guess for the timing of lift-off.
Initial claims for unemployment insurance ticked up inconsequentially, by 3,000, to hit a still ultra-low 287,000 for the week ending October 25. Continuing claims increased by 29,000 for the week ending October 18, to reach 2,384,000, also still a very good number.
New orders for durable goods declined by 1.3 percent in September. This number looks like it is still impacted by the gyration in orders through July and August that came as a result of record commercial aircraft orders.
House prices are firming again. According to the Case-Shiller U.S. House Price Index for August, prices are up 0.4 percent for the month, following a 0.1 percent gain in July. This breaks a three-month slide in national average house prices.
Real disposable personal income was unchanged in September, held in check by soft gains in wages and salaries. Real consumer spending declined by 0.2 percent.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 10-31-14.