Preliminary Third Quarter GDP

That’s it? The preliminary estimate for third quarter Gross Domestic Product (GDP) from the Commerce Department was low. Fortunately for the markets, expectations were subdued as well. The seasonally adjusted annualized rate of growth was 2%. As we have written frequently, consumption makes up over two-thirds of our economy and will need to improve faster than it has for this recovery’s pace to get back on track with normal recoveries.

Personal Consumption Expenditures (PCE) is how the American consumer is quantified in GDP. The third quarter statistic shows an increase of 2.6%. Durable goods, items expected to last longer than three years, grew by 6.1%. This is encouraging because these items tend to be more expensive, often entail debt, and take more confidence to purchase, but this increase is marginally slower than the second quarter’s rate. While consumers did some of the heavy lifting, they needed assistance.

Businesses provided help. Nonresidential fixed investment grew by 9.7% as companies purchased the wares needed to carry out their activities. While business inventories increased, it is unclear how this build up will play out. The two possible scenarios are as follows: A) companies are anticipating correctly and the fourth quarter will see higher sales, or B) the sales pace of the 3rd quarter was slower than expected, and industries will have to work through their inventories before ordering more. The latter scenario will put pressure on the employment data. Let’s hope scenario “A” plays out.

In summary, two of the most important components of GDP are growing. The issue at hand is the strength of the growth. It is not currently at a pace which reflects the expectations of an economy receiving the amount of help that has been provided by both the government and our central bank. For now we will note the figures provided and wait for the first revision due at the end of November. As a reminder, the second quarter’s revisions were lower than the preliminary figure. Perhaps some of your big purchases have yet to be tallied, and this time the revision will be higher.