Monday Update: Third-Quarter GDP Growth Beats Expectations

Posted by Sam Millette

This entry was posted on Dec 2, 2019 9:39:01 AM

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In his Monday Update, Commonwealth’s Sam Millette discusses consumer confidence trends, upcoming ISM data, and what may be ahead for international trade.Last week was filled with economic updates, as we finished out the month of November. The highlight was the second estimate of third-quarter GDP growth, which showed faster economic growth than previously reported. This week, data releases will focus on business and consumer confidence, international trade, and November’s employment report.

Last week’s news

On Tuesday, October’s new home sales report was released. It came in better than predicted, with 733,000 sales against expectations for 705,000. In addition, September’s report was revised upwards, from an original estimate of 701,000 sales up to 738,0000. These results have pushed new home sales to their highest level since July 2007, as low mortgage rates continue to drive additional buyers into the market. Looking forward, new home sales should help bolster home builder confidence, which should, in turn, lead to faster growth in construction. The October release served as another reminder that the housing sector of the economy is currently doing well, spurred in large part by the low terms for borrowing.

Also on Tuesday, the Conference Board consumer confidence survey for November was released. Unfortunately, confidence came in worse than expected, falling from 126.1 in October to 125.5 in November, against economist expectations for a modest increase to 127. This marks the fourth straight month of declines for this index, which is disappointing given the strong equity market performance and last month’s better-than-expected jobs report. There was some good news, however, as the subcomponent of the index that measures future expectations increased from 94.5 to 97.9, giving some reason for optimism going forward. Nonetheless, regarding the holiday shopping season, this report is a bit worrisome, given the link between consumer confidence and consumer spending.

On Wednesday, the October durable goods orders report beat expectations. Durable goods orders grew by 0.6 percent during the month, a much better result than the 0.9 percent decline that economists forecasted. Core demand was equally strong, as orders that strip out the impact of the volatile transportation segment grew by 0.6 percent. These results came despite the General Motors (GM) strike that was ongoing for most of October. So, this update is encouraging, as it demonstrates that business owners are willing to invest despite continued uncertainty from the U.S.-China trade war. With the GM strike well behind us and potential for a “phase one” trade deal between the U.S. and China, increased business investment may help boost overall economic growth as we finish out the year.

Speaking of overall economic growth, the second estimate of third-quarter GDP growth was another positive update. The economy grew at an annualized rate of 2.1 percent in the quarter, which is higher than the 1.9 percent growth rate originally reported. It’s also significantly better than the 1.6 percent growth rate forecast prior to the first GDP estimate and even beats the 2 percent pace in the second quarter. This result helped calm concerns that we would see a more serious slowdown following the first quarter’s 3.1 percent growth rate. Overall, while the economy has slowed down, growth is still growth. The fears of an accelerated slowdown may have been overstated.

We finished the week with Wednesday’s release of October’s personal income and personal spending reports. Economists expected to see 0.3 percent growth for both income and spending. But while spending met that number, income remained flat. This miss in income growth is not an immediate cause for concern, however, as it was due to a slowdown in farmer subsidies and lowered interest income caused by lower interest rates. That said, we’ll need to monitor consumer spending growth going forward, as it has been the major driver of overall economic growth this year. For the most part, income growth has been keeping pace with spending growth.

What to look forward to

On Monday, the ISM Manufacturing index was released. This gauge of manufacturer confidence was expected to increase from 48.3 in October to 49.2 in November. Instead, it declined further to 48.1. This is a diffusion index, where values below 50 indicate contraction. So, the decline keeps this section of the economy in a slowdown. Declines in inventories and new orders, as well as employment expectations, weighed on the reading.

Wednesday will see the release of the ISM Nonmanufacturing index, which is expected to show a modest decline from 54.7 in October to 54.5 in November. As was the case with the manufacturing index, this is a diffusion index. Here, values above 50 indicate expansion. While a decline would be disappointing, the index is expected to remain in expansionary territory for November. Accordingly, there’s no major cause for concern for the time being. The anticipated decline would leave the index at levels that have historically indicated slow overall economic growth.

On Thursday, October’s international trade report is set to be released. Economists believe that the trade deficit will narrow from $52.5 billion in September to $48.4 billion in October. Such a result would represent the smallest monthly deficit since June 2018. Previously released advance trade data showed a drop in both exports and imports of goods during October, with a larger decline in imports causing a shrinking deficit in the trade of goods. Some of the slowdown in imports can be attributed to the GM strike, so November’s data may rebound given the end of the strike. Looking forward, exports are not expected to grow meaningfully in the short term unless the U.S.-China trade talks reveal progress.

On Friday, we’ll get the November employment report. Expectations are for 190,000 new jobs, which would be a strong showing following October’s addition of 128,000 jobs. The unemployment rate is expected to remain flat at 3.6 percent, while average hourly earnings growth should increase to 0.3 percent on a month-over-month basis. Despite the expected acceleration in job growth in November, the pace of expansion has slowed noticeably from 2018 levels.

Finally, we’ll finish the week with the first estimate of the University of Michigan consumer confidence survey, which is expected to increase from 96.8 in November to 97 in December. Unlike the Conference Board measure of confidence, this index has been steadily improving for the past few months after hitting a two-year low of 89.8 in August. November’s result would mark the fourth straight month of increasing confidence. Even so, the index will still sit below recent highs set in 2018. 

That’s it for this week—thanks for reading!

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