KEY DATA: GDP: +2.9%; Consumption: +2.1%; Consumer Prices: +1.4%/ ECI (Over Year): +2.3%; Wages: +2.4%
IN A NUTSHELL: “After three tepid quarters of growth, the economy was due for a rebound and it got it.”
WHAT IT MEANS: The economy continues to plod along. Growth expanded solidly in the third quarter. While some may say that 2.9% is nothing special, given that trend growth is about 2.25%, the number posted for the summer increase is quite solid. The details say the same thing. Household spent moderately but not exuberantly. They bought big-ticket items and services, but not soft goods. Businesses invested in structures and intellectual property, but not for machinery. The government essentially got out of the way. There were two surprises, at least to me, in this report. First, housing was down sharply. This sector has been improving steadily and I suspect it will add to growth in the fourth quarter. The second was the narrowing in the trade deficit. Despite the weakness around the world and a still strong dollar, U.S. businesses did quite well shipping products overseas. In contrast, imports hardly increased. The consumer is buying lots of goods, so look for that improvement to fade quickly. Finally, after an actual reduction in inventories in the spring, firms stocked up in the summer, adding significantly to growth. On the inflation front, consumer prices rose modestly. Excluding food and energy, they were up a little faster (1.7%) but still not at the Fed’s 2% target.
The Employment Cost Index was also released and in the third quarter, compensation rose moderately. Wage and salary gains are accelerating, but very slowly. In September 2015, the year over year rise in wages and salaries was 2.1%, compared to 2.4% in September 2016. Those working in finance and hotels and restaurants did a lot better. Benefits are accelerating faster, though. The September 2015 increase was 1.8% compared to the current 2.3% gain. Public sector benefit increases drove that acceleration. Public worker wage gains, though, rose slower than private sector employees. Finally, nonunion compensation gains continue to outpace union increases.
MARKETS AND FED POLICY IMPLICATIONS: Economic growth is neither too hot nor too cold, but it is hardly just right. Weak productivity gains and slow labor force growth are reducing the potential for the economy to expand, so we really need to get realistic about what is possible. Of course, in this environment where all economic numbers are viewed as political talking points, this report will either be called terrible or great. It is neither. It is, however, what we should get used to because it is not likely we will go back to any extended period of 3.5% or 4% or 5% growth that some claim they will create. Janet Yellen might like the economy to run hot, but how you get there is anyone’s guess. Low rates are not doing the job. Which brings us to next week’s FOMC meeting. Nothing that has come out requires the Fed to do anything. With the election less than a week after the statement is released, it is doubtful the Fed will announce a rate hike. But I do expect that the statement will hint quite strongly at a move in December by saying something like “a rate hike by the end of the year is possible (or likely or whatever)”. Given there is only one meeting left, that kind of limits things. Investors might like this report as it hints at continued good profits going forward. Sadly, the election is still looming.