Third Time’s a Charm

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Thursday, US Q3 GDP was revised up to 3.1% q/q annualized from the BEA’s November estimate of 2.7% q/q. The result easily bested expectations, although pockets of weakness still exist in the economy (as there nearly always are). Specifically contributing to the boost were personal consumption expenditures (aka consumer spending, revised up from 1.4% to 1.6%) and imports (falling from 0.1% to -0.6%). GDP’s calculation uses net exports (exports minus imports), so falling imports (not necessarily a reflection of economic health) add to headline growth. To us, all this reaffirms our view economic expansion likely continues ahead—with growth rate wiggles, of course. Wiggles that have existed always and forever, throughout history.

Q3’s acceleration marks the fastest pace of US growth since late 2011 and the 13^th straight quarter of overall growth. Among the reading’s other components private inventory investment, government spending, residential fixed investment and exports contributed to the increase, while non-residential fixed investment detracted. While increases to consumer spending and exports were clear positives, many viewed the reading with skepticism about future quarters, as inventory builds and federal government spending each contributed about 0.7% to the result. Those forecasting future weakness would suggest inventory stockpiles are likely to slow future business spending. Yet another way to take this data point is relatively normal seasonal build before the holiday season. This factor, simply, is open to many and various interpretations.

Likewise, future budget cuts and austerity measures could impact government spending—thereby removing two current cogs of growth in Q4 2012 and early 2013. And to be sure, economists now expect growth will slow to just 1.3% q/q in Q4 and 1.7% q/q in Q1 2013. Combined with fears of the fiscal cliff’s impact on consumer spending, it’s easy to see why expectations are depressed. Yet in reality, those dour expectations are actually bullish for investors.

While it’s likely government spending falls in the future (the federal result was boosted by one-time defense related spending in Q3 and in earlier quarters, total government spending was already declining), to us, all else being equal, it’s unlikely GDP growth falls off a cliff—even if we do fall off the fiscal cliff. Consumer spending—the lion’s share of US economic activity—accelerated from its previous pace and has grown for 11 straight quarters now. And despite sagging consumer confidence, retail sales for the holiday shopping season have easily exceeded most expectations. (Watch what people do, not what they say.) However, as we’ve said before, economies don’t move in straight lines up (or down)—they’re nearly always subject to variability. So even if the growth rate slips slightly in the coming quarter or moves up from here, that doesn’t necessarily dictate the future beyond. And, of course, figures can always be revised months or years from now, too. For the worse or the better—not unlike Thursday’s nice boost.