The BEA's Third-Quarter 2019 (Advance Estimate) of GDP this morning came in at 1.9%.

The spin of Econonday vs Consumer Metrics is interesting.

Econoday Highlights

  • The third quarter was solid but with one uneven edge, at an inflation adjusted 1.9 percent annual rate which is near the top end of Econoday's consensus range and only 1 tenth below the second quarter's 2.0 percent rate. The good news is that strength is squarely centered in the most important component, and that's real consumer spending which rose at a 2.9 percent pace despite a very tough comparison with the second quarter's unusually strong 4.6 percent showing. And within consumer spending, durable goods continue to post very sharp growth at a 7.6 percent rate versus 13.0 percent in the second quarter with both quarters showing especially strong results for recreational goods & vehicles. This speaks to discretionary strength at the consumer level.
  • Residential investment is another important positive in the third quarter report, rising at a 5.1 percent rate and offering the first positive contribution to GDP since the fourth quarter of 2017. Government spending was also a plus for the third quarter, rising at a 2.0 percent rate which, however, is down from 4.8 percent in the second quarter. Federal nondefense spending led the quarter at a 5.2 percent rate with defense at 2.2 percent growth.
  • The report's big negative is a second straight quarter of contraction for nonresidential fixed investment, falling 3.0 percent after the prior quarter's decline of 1.0 percent. Nonresidential structures showed special weakness with equipment also in contraction. The Federal Reserve, citing slowing global growth, has signaled special concern over the outlook for US manufacturing and specifically the outlook for related business investment. These results will add to the arguments for those on the FOMC who are pushing for a rate cut at today's meeting.
  • Net exports were a small negative in the quarter, pulling GDP down by 0.08 percentage points despite a turn higher for exports. Inventories pulled GDP down by 0.05 points for a second straight negative contribution.
  • But it's consumer spending and its contribution of 1.93 points that headlines third-quarter GDP, pointing to fundamental momentum for the economy and ultimately reflecting the strength of the US labor market.

Consumer Metrics Institute

The minor change in the headline masked a material weakening in the growth of consumer spending. The growth rate for aggregate consumer spending on goods and services was reported to be over 1% lower (-1.10 percentage point: pp ) than in the prior quarter. The growth of governmental spending (Federal, state and local) also weakened by about half of that amount. But largely offsetting those negative impacts on the headline number were soaring inventories and exports.

Annualized household disposable income was reported to be $253 higher than in the prior quarter, and the household savings rate was reported to be 8.1%, up 0.1 pp from the prior quarter.

Consumer Metrics Institute Highlights

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  • Consumer spending for goods was reported to be growing at a 1.14% rate, down -0.60pp from the prior quarter.
  • The contribution to the headline from consumer spending on services was reported to be 0.79%, down -0.50pp from the prior quarter. The combined consumer contribution to the headline number was 1.93%, down -1.10pp from the prior quarter.
  • The headline contribution for commercial/private fixed investments was reported to be -0.22%, up 0.03pp from the prior quarter.
  • Inventories subtracted -0.05% from the headline number, up 0.86pp from the prior quarter. It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity pricing or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.
  • The contribution to the headline from governmental spending was reported to be 0.35%, down -0.47pp from the prior quarter.
  • The contribution from exports was reported to be 0.09%, up 0.78pp from the prior quarter.
  • Imports subtracted -0.17% annualized 'growth' from the headline number, down -0.18pp from the prior quarter. Foreign trade contributed a net -0.08pp to the headline number.
  • The annualized growth in the 'real final sales of domestic product' was reported to be 1.98%, down -0.94pp from the prior quarter. This is the BEA's 'bottom line' measurement of the economy (and it excludes the inventory data).
  • The real per-capita annualized disposable income was reported to have increased by $253 quarter to quarter. The annualized household savings rate was 8.1% (up 0.1pp from the prior quarter). In the 45 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 1.50%.

Mish Take

There is something for everyone to cheer or knock. Take your pick.

My main beef is the Econoday notion that spending drives the economy. It doesn't. Consumers going in debt to buy things they cannot afford is not a sign of strength.

For discussion please see Debunking the Myth “Consumer Spending is 67% of GDP”

Also see Tale of Two Economies: Industrial Production vs Retail Spending

The debate over consumer spending aside, Trump's trade war took a toll on manufacturing. The GM strike did not help.

The overall result with the trade war and strike factored in might have been better than expected.

Mike "Mish" Shedlock

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