- Friday's US Q3 2010 GDP report contained many nuggets of data speaking directly to widely held fears.
- Fears from hunkered-down US consumers to jittery businesses hoarding cash are common myths dispelled by GDP data.
While GDP reports are an imperfect view of economic performance, they do contain a bevy of data points worthy of consideration. Friday's US Q3 GDP report was no exception. Within it, data spoke loudly to those claiming the US is currently bogged down in an economic quagmire.
To start, GDP grew for a fifth consecutive quarter—this time +2.0% annualized, matching expectations and accelerating from Q2. Like Q2, imports were the biggest drag on the headline number, subtracting 2.61%. Frequent readers may recall imports detract from GDP but they're not a sign of true economic weakness. Increasing trade overall is a positive, and strong imports show strong US demand for foreign goods.
Moving beyond the headline number, underlying data continues to contradict fears the US (and the world) is in a momentary pause during ongoing overall weakness. For example:
Fear #1: The American consumer passed away in 2009 or high unemployment will prevent consumers from opening their wallets.
Fact: In Q3, US consumer spending accelerated and beat expectations. The 2.6% increase (which followed an acceleration in Q2) is the fastest growth in consumer spending since 2006! Nominal personal consumption already recouped its small recessionary decline in Q1, and now real personal consumption is within a hair of its pre-recession high. We doubt this means consumer-zombies have risen from the grave—US consumer spending simply wasn't dead in the first place.
Fear #2: US economic growth is too sluggish to reduce unemployment.
Fact: The assumption here is that growth precedes employment improvements (which is correct), but contrast this with more common media reports arguing high unemployment will doom economic growth. Frankly, you can't have it both ways.
We've addressed the latter part of this many times. As to the former, what's the supposedly magic GDP number driving mass job creation? There isn't one—GDP is a macroeconomic indicator regarding single-country output. It is not a pure measure of economic health and certainly isn't a timing indicator for hiring—payroll decisions are company-specific to say the least.
Fear #3: The US has had a flat decade—like Japan.
Fact: 10-year returns on US equity markets were flat at a point a few months ago. But GDP? Not even close. In 1999, nominal US GDP was approximately $9.9 trillion. Today, it's over $14 trillion dollars and at an all-time high. Real GDP has seen similar growth the past decade and is less than 1% from an all-time high today.[i] Contrast that with Japanese GDP which peaked in the mid-1990s.
Fear #4: Businesses are hoarding cash.
Fact: Q3 marked the fifth consecutive quarter of increased business spending. This has been a key component of the economic recovery—and with profits replacing cash almost as quickly as businesses spend it, corporations have ample liquidity to spend more in future quarters.
Fear #5: Growth has been driven only by businesses restocking inventories—which is likely over.
Fact: Businesses again added to inventories in Q3, contributing nicely to growth. But, given sales gains and extreme recession-driven cutbacks before the build began, business inventories remain lean today. Moreover, businesses build inventory in anticipation of demand—so an inventory build is bullish, not bearish. (Unless, that is, consumer and business demand is dead. But here again, see fear #1 above.)
While GDP reports show past growth, the Chicago Purchasing Managers' Index and Milwaukee National Association of Purchasing Managers' Survey each rose in Friday's release and remain solidly expansionary—indicating likely future growth in manufacturing.
Focusing on facts to check fears is key to successful investing. After all, many times it isn't market movement driven by fundamentals producing poor investment performance—results can frequently be driven by investors' emotional reactions to market movement, data, and headlines. Friday's report should relegate many widely held fears to the category of ghost stories to read on Halloween—fun (or not) for entertainment, but far from reality.