Fra Zerohedge:
With the US economy firing on all four cylinders heading into the 3rd quarter, largely thanks to the latent effects from Trump’s fiscal stimulus, the BEA released its second estimate of Q3 GDP which confirmed what we learned one month ago, namely that the US economy grew at an annualized rate of 3.5%, in line with both expectations and the first estimate released a month ago.
Combined with the 4.2% GDP growth in the second quarter,, the results capped the best back-to-back quarters since 2014. At the same time, growth is projected to moderate this quarter. Furthermore, just like last month, a quick look at the internals reveals some ugly details below the surface.
While household spending remained strong, rising 3.6% after 3.8% in Q2, the largest increase since Q4 2014, it shrank from the first estimate of 4.0%, and missed expectations of 3.9%, contributing 2.45% of the bottom line 3.500% GDP print (below the 2.69% in the first estimate), the main reason why the US economy grew as fast as it did in the third quarter was a build up in inventories, which contributed even more than was previously estimate, or some 2.27%, or 65% of the bottom line number. This was the biggest quarterly inventory stocking since the last quarter of 2011.
The biggest change from the prior report on GDP came from stronger business investment offsetting the decline in personal spending, while most other categories were in line with earlier readings.
Other revisions included an improvement in equipment spending which was revised up to a 3.5% rise from a 0.4% gain, while investment in structures showed a 1.7% drop compared with a previously reported decline of 7.9%.
Net exports subtracted 1.91 percentage point from growth, while inventories added provided a 2.27 point boost.
All other components of GDP were ugly, with nonresidential fixed investment, or spending on equipment, structures and intellectual property shrinking to 2.5% in 3Q after rising a blistering 8.7% in the prior quarter. Government spending increased at a 2.6 percent rate, revised from 3.3 percent. That added 0.44 point to growth.
Housing posted a third consecutive drag on GDP growth and reaffirmed that the industry has entered a broad slowdown. Residential investment fell 2.6% compared with an initially reported contraction of 4% .
Here is a breakdown of the less than stellar components:
- Fixed Investment added 0.25% from the bottom line number
- Exports subtracted -0.55% from the bottom line number
- Imports subtracted -1.36% from the bottom line number
In other words, between CapEx and Net Trade, the US economy actually contracted by 1.7%.
The final offset was government consumption which added 0.55% in Q3, resulting in the following breakdown
Today’s report also showed that corporate pretax earnings rose 10.3% annualized from a year earlier, the most in six years, after a 7.3% advance in Q2:
- Profits of domestic nonfinancial corporations increased 5.1% after increasing 4.2%.
- Profits of domestic financial corporations decreased 1.7% after increasing 3.7%.
- Profits from the rest of the world increased 3.7% after decreasing 0.9%.
Gross domestic income rose 4%, the most since 2014.
Other details from today’s GDP report showed that the economy may have indeed peaked, with core PCE rising just 1.5% in 3Q after rising 2.1% prior quarter, missing expectations of a 1.6% print. The GDP price index came in line at 1.7% in 3Q after rising 3.0% prior quarter.
Separately, final sales to private domestic purchasers q/q rose 3.1% in 3Q after rising 4.3% prior quarter.
Meanwhile, rising risks to the outlook include the escalating trade war with China, a slowing global demand (see today’s Tiffany’s results) and rising borrowing costs, while the boost from President Donald Trump’s fiscal stimulus is expected to end next year.
