10/27/23 – Strong Q3 GDP driven by consumer, inventory build and government spending

As expected, the robust retail sales recorded over the last three months solidly contributed to the outsized Q3 GDP that came in at 4.9%, exceeding the 4.5% consensus expectation.  The personal consumption component rose 4.0%, outpacing the 0.8% gain in the previous quarter.  Digging into the details, the number isn’t as outrageous as at first glance.  Firstly, the government measures the activity versus the previous quarter which, in itself, makes no sense.  Every quarter has unique characteristics that impact spending patterns.  Vacations in the third quarter, gift giving in the fourth.  To adjust for that, the Bureau of Economic Analysis smooths the measure with a seasonal adjustment factor.  We prefer, instead, to compare activity on a year-over-year basis and remove the smoothing.  On a year-over-year basis, Q3 GDP expanded 2.9%, still an excellent outcome.  Another consideration is that government spending represented about 25% of the gain for the quarter.  At this stage of the expansion, we’d prefer to see that contribution closer to zero.  Nevertheless, it was a solid report that has economists forecasting that it will provide a tailwind to fourth quarter growth.  We’re not so sure we’d agree with that assessment.  Credit card metrics have been ticking up with the amount of card debt outstanding topping $1 trillion, and the average interest rate charged has drifted up sharply.  Also, the resumption of student loan debt repayment is likely to be somewhat of a drag.  The question of how much remains unanswered.

This morning the University of Michigan released their various consumer surveys, with the expectation for inflation in the coming twelve months rising to 4.2% up from 3.8% last month.  The median long -run inflation expectation was steady at 3.0% versus last month’s reading; not great but it tempers the 12-month expectation.

While the bond market didn’t seem to care about any of the data released this week, stocks have been under pressure, closing down nearly 2% for the week and down nearly 10% from the high touched in July.  Earnings have been okay, aside from Alphabet.  The parent company of Google reported below expectations revenue from cloud computing, the unit investors had been expecting to lead the company in future sales.  Investors punished the stock, with GOOG closing down 10% for the week.

Looking forward, the government is set next week to release a host of secondary economic indicators in addition to the all-important monthly non-farm payroll report.  The jobs report is expected to slow to 183,000 new job growth in October, down from the torrid 336,000 jobs created in the prior month, with the unemployment rate expected to remain steady at 3.8%.  The FOMC meeting, which drives increased market volatility, is expected to be a non-event, as they are widely expected to leave rates unchanged.  We are in consensus and expect that they won’t do anything?