3rd Quarter Real GDP Growth Expected to be ~1.8%
Q319 U.S. real GDP is forecast to come in right around a 1.8% annual rate vs. a tepid 2.0% annual rate in Q2, Productivity growth (output per hour) has picked up from where it was earlier in the expansion –due largely to tax cuts and deregulation – and so growth seems positioned to re-accelerate. Trade angst has caused some downward pressure on production and trade, hastened by hurricane Dorian, and the GM strike took a tenth of a percent or so off growth. Congress should make the trade situation better by passing USMCA (the new NAFTA). And the pressures on both China and the US to sign a first step agreement - or at least call a truce - are high.
In the meantime, monetary policy remains loose for economic purposes, suggesting fears of a recession are overblown. Looking at "core GDP," which is the combined real growth in personal consumption, business investment, and home building, looks like it grew at a 2.2% annual rate in the third quarter. The economy may not be booming, but the underlying trend remains healthy.
- Consumption: Car and light truck sales grew at a 0.2% annual rate in Q3, while "real" (inflation-adjusted) retail sales outside the auto sector grew at a 3.9% rate. Consumer spending on services grew at a ~1.0% rate. Combined, real personal consumption (of goods and services combined) grew at a 2.6% annual rate, contributing 1.8 points to the real GDP growth rate (2.6 times the consumption share of GDP, which is 68%, equals 1.8).
- Business Investment: Continued investment in equipment and intellectual property was mostly offset by declines in commercial construction. Combined, business investment grew at a roughly 1.0% annual rate in Q3, which would add 0.1 point to real GDP growth. (1.0 times the 14% business investment share of GDP equals 0.1).
- Home Building: Residential construction has been flat to negative in each of the past six quarters, and Q3 was no different, likely coming in at zero change for the quarter. Expect a turnaround in the quarters ahead as home builders are still constructing too few homes given population growth and the scrappage of older homes. In the meantime, a 0.0% pace in Q3 translates into zero net contribution to Q3 real GDP growth. (0.0 times the 4% residential construction share of GDP obviously equals 0.0).
- Government: A relatively small 0.6% increase in real public-sector purchases in Q3, adds 0.1 point to the real GDP growth rate. (0.6 times the government purchase share of GDP, which is 18%, equals 0.1).
- Trade: Net exports' effect on GDP has been very volatile in the past year, probably because of companies front-running - and then living with - tariffs and temporary trade barriers. Net exports added 0.7 points to the GDP growth rate in Q1, and then subtracted 0.7 points in Q2. We're expecting a 0.4 point drag in Q3.
- Inventories: Inventories are a wild-card because as data on what businesses did with their shelves and showrooms in September was not available. But it looks like the pace of inventory accumulation picked back up in Q3, which should add 0.2 points to real GDP growth.
Add it all up, and it’s a 1.8% annualized real GDP growth. Expect noticeably faster growth in the fourth quarter, led by an improvement in home building and less of a drag from commercial construction. The bottom line; nothing in the quarter suggests a recession, or that Treasury yields should remain as low as they are today. From: ftadvisors