3Q14 GDP (advance est): Parsing the Hangover
A sequential slowdown in GDP in 3Q14 from the near 5% in 2Q14 was as inevitable as the sequential acceleration from the worst post-war expansionary period GDP print ever in 1Q14.
So how bad was the hangover?
- Growth: Sequential growth across Durables, NonDurables, Residential Investment and NonResidential investment all slowed QoQ (again, not a real surprise given the comps – was anyone really modeling Investment to comp a 19% comp?)
- Inflation: GDP deflator decelerated -0.8% (to +1.3% from +2.1%) sequentially. The lower deflator helped support reported real growth but Nominal GDP was above trend also. Nominal grew at +4.7% - that is down vs 2Q’s inflated +6.7% gain but higher than the 4-qrt and 8-qtr ave of 4.2% and +3.7%, respectively.
- Consumption: Contributed +1.22 (down from +1.75 in 2Q) and growing just +1.8% QoQ (vs +2.5% prior) with Durables & NonDurables decelerating and Services up small. Growth in Durables consumption is a fledgling positive sign for domestic consumerism and has supported the aggregate PCE in recent quarters. A slowdown there (ie. the Sept Retail Sales/Durable goods data) will be a bit of a drag, both to consumer spending growth and to growth in (revolving) credit. We’ll get the final Income & Spending detail data (Sept) tomorrow. So long as the rising savings rate offsets accelerating income growth, the upside in household spending will remain constrained.
- NX: The trade balance was sizeable…contributing +1.32 to GDP (vs. -0.34 prior) as exports grew +7.8% QoQ vs. a -1.7% decline in Imports. With ROW slowing, the $USD higher and domestic demand better on a relative basis this magnitude of strength is likely nonrecurring/reversing.
- G: A positive support and big increase in defense spending. Government expenditures contributed +0.83 (vs +0.31 prior) with Growth QoQ = +4.6% (vs. +1.7% prior) and Defense spending up 16% QoQ and contributing at big +0.7. This was highest contribution since 2Q09 (political conspiracy theorists unite!).
- Inventories: after contributing +1.4 to GDP in 2Q, Inventories were a drag with a -0.6 contribution in 3Q as comps were tough and middling consumption growth failed to expeditiously draw down that burgeoning inventory stock.
- Investment: Not much doing…Investment growth moderated sequentially but Gross and net Domestic Private Investment as % of GDP was essentially flat ...same for Residential & NonResidential construction
- Real Final Sales (GDP less Inventory Change): +4.2%, accelerating 100bps sequentially and +70bps above headline.
- Gross Domestic Purchases (GDP less exports, including imports): Decelerating -210bps sequentially to +2.1%
- Real Final Sales to Domestic Purchasers (GDP less exports less inventory change): arguably the best read on overall domestic private sector demand = decelerating to +2.7% from +3.4%, but holding above trend.
Overall, the 3Q advance estimate probably scores as a 1 aspirin hangover on our proprietary hangover scoring algorithm. Government & Net Exports were outsized contributors with investment slowing off a strong 2Q and consumption still middling.
So, easier sequentials for C & I in 4Q vs. tougher year-over-year compares alongside global growth slowing and disinflation predominating. We're still modeling Quad #4 for the U.S. in the fourth quarter
On balance – if you give allowance to the under the hood dynamics – this is really just more of the same….we’re around 2-2.5% real economy.
INITIAL CLAIMS: The good news is claims are hitting new lows. The caveat is this has been a dangerous place historically over the intermediate/long term.
Below is the detailed breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact
Last week we wrote that jobless claims dropped to a new low of 281k - for perspective that was lower than at any point in the peak of the economic expansion in 2005/2006. This week, claims are unch'd at 281k again. Meanwhile, our gauge of rate of change looks at the y/y change in the rolling NSA claims, which accelerated further to its fastest rate YTD at -21%. The progress in the labor market remains substantial. Credit-sensitive financials still have the wind at their back.
Just as the day is always darkest before dawn, the reverse holds true too. The sun is always brightest before night, or something like that. The chart below is really the point. At 281k rolling initial claims the economy is now in-line with the all-time lows put in during each of the last three economic cycles (2006, 2000 and 1988).
Prior to revision, initial jobless claims rose 4k to 287k from 283k WoW, as the prior week's number was revised up by 1k to 284k.
The headline (unrevised) number shows claims were higher by 3k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -0.25k WoW to 281k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -20.7% lower YoY, which is a sequential improvement versus the previous week's YoY change of -19.5%.
Christian B. Drake
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT