3Q13 GDP (1st Revision): Juiced by inventories. Rising probability of a sequential slowdown
3Q13 GDP was revised +0.8 higher to 3.6%, marking the best growth number since 1Q12. Under the hood, the component dynamics that characterized the advance estimate – namely, inventory accumulation alongside middling consumption/real final sales – were further exaggerated in this first revision.
Inventory Accumulation contributed +1.68 to GDP while consumption (services) growth slowed 40bps sequentially and real final sales (GDP less Inventory change) and real final sales to domestic consumers (GDP less exports less inventory change) both came in sub 2%.
While backlogs are growing and vendors remain largely unconcerned with inventory levels according to the ISM survey data, the positive impact to GDP should reverse as inventory drawdown will be challenged by final demand still constrained by flagging personal income growth.
In short, the strong headline print belied a moderately more vapid reality. While momentum in the manufacturing base remains ongoing and disposable personal income growth comps ease through 2014, a sequential slowdown in growth is increasingly probable. We’ll get a first look at personal income and spending data for 4Q13 tomorrow alongside the payroll report.
On the employment side, despite sizeable fluctuations in the absolute number of non-farm payroll gains the last few month, the rate of growth on a 2Y basis has held relatively consistent at ~+1.66% - a phenomenon largely stemming from seasonality. Consensus is basically sitting right on this growth number with the current NFP estimate for November at +185K. As a reminder, seasonality will build as a positive support to both the NFP and jobless claims figures through 1Q14.
From a policy perspective, today's growth data is probably another non-catalyst with inflation still holding below target, service consumption growth flagging and sustained acceleration in the aggregate labor market data still absent.
But at the same time, if you can’t taper at 3.6% GDP, when can you taper?
- Hedgeye Macro
INITIAL CLAIMS: The Fed needs to bury its head further into the sand to reconcile its policy on purchases with the realities of the labor market.
Rising Rates Love Falling Claims
It's getting harder to ignore the improvement in the labor market, unless, of course, you're the Fed.
Increasingly, however, it seems as though the bond market is taking fewer cues from the Fed and more from the labor market. True, seasonally-adjusted initial claims have a 2-handle on them principally because of the Thanksgiving mismatch this week vs last year (a week later this year), but adjusting for that and all the other recent turbulence in the data reveals one unmistakable fact. The data continues to strengthen and the bond market is taking notice.
Aside from the obvious, which is that this is more good news for credit quality, the upward pressure being exerted on rates is ferreting out clear winners and losers, i.e. good for banks and online brokers, and bad for homebuilders and mortgage REITs. For more details, see our note from 11/22 "#Rates-Rising: A Current Look at Rate Sensitivity Across Financials", a link to which can be found here.
Next week should be the first week in a long time where we get a clean print on the labor market, so stay tuned.
Nuts & Bolts
Prior to revision, initial jobless claims fell 18k to 298k from 316k WoW, as the prior week's number was revised up by 5k to 321k.
The headline (unrevised) number shows claims were lower by 23k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -10.75k WoW to 322.25k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -21.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -13.3%
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT