This initial report is always a bit misleading as the final components aren’t fully tallied, but the report gives investors a pretty broad overview of the situation in the U.S. economy – growing, but sluggish. Third quarter GDP showed a 2% annualized growth rate which was exactly in-line with expectations. Personal Consumption Expenditures showed some surprising strength at 2.6%, however, the positive print in the headline figure was largely due to the inventory figures which added 1.4%. The impact in coming quarters should be far more muted. Prices were a bit higher, but still historically low at 2.3%.
As stimulus becomes a drag on overall GDP it will be interesting to see if the US economy can keep its head above water in 2011. At this rate, it’s looking like we could slow even further in the coming quarters. On the bright side, the market will view this as a sure sign that the economy needs more help, which, unfortunately is coming in the form of QE. Econoday details today’s report:
“The latest quarter was led by gains in inventory investment, consumer spending, equipment investment, and government purchases. The best news is that PCEs posted a 2.6 percent increase, following a 2.2 percent rise in the second quarter. The latest figure is the strongest since late 2006. On the negative side, housing investment fell back and net exports worsened on higher imports. But the “swing” in net exports actually improved. That is, net exports widened at a slower pace in the third quarter compared to the second quarter. Exports rose moderately.
How strong final sales are is still an important issue in terms of whether demand is picking up or not and it slowed by both key measures. Growth in real final sales to domestic purchasers slowed to 2.5 percent, following a 4.3 percent boost in the second quarter. Final sales of domestic product (adds in net exports) eased to 0.6 percent from 0.9 percent annualized in the second quarter. A big question is whether the boost in imports reflects optimism on the part of businesses that spending is going to pick up-and there is no certain answer. The surge in both imports and inventories at the same time implies optimism-along with the improvement in PCEs. But if demand does not pick up, the boost in inventories will be a negative in coming quarters.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.