There were several important reports on the economy released this morning. First, data from the Bureau of Economic Analysis (BEA) showed that U.S. gross domestic product (GDP) growth accelerated in the third quarter of 2016. Specifically, real GDP, which measures the value of the production of goods and services in America adjusted for price changes (inflation), increased at an annual rate of 2.9 percent in Q3. That is up from the second quarter’s 1.4 percent pace of expansion, above the 2.5 percent consensus forecast, and the first growth reading above 2 percent in a year. In fact, this was the strongest GDP print since Q3 2014, which really says more about how weak growth has been over the past two years. Strength in the third quarter was driven by a jump in exports and a significant build in inventories, with the latter suggesting that the inventory down cycle may finally be over. Personal consumption expenditures (consumer spending), which accounts for more than two-thirds of economic output, rose by only 2.1 percent in Q3, a decrease from Q2 and less than projected. It is worth mentioning that this is only the first (advance) estimate of third quarter GDP growth, and it is therefore possible that the headline figure will be revised much higher (or lower) over the next few months. Overall, though, this is an encouraging report which suggests that the U.S. economy is good but not great, and will continue to rise and fall with the consumer. Solid employment and steady income gains will be needed for stronger growth down the road.
Next, a report from the Bureau of Labor Statistics (BLS) showed that employment costs (employer-paid taxes such as Social Security and Medicare in addition to the costs of wages and benefits) in America continued to grow at a somewhat elevated pace in the third quarter. Specifically, total compensation costs for civilian workers lifted by 0.6 percent in Q3 2016, in line with what economists had predicted and similar to the gains seen over the past year. Wages and salaries, which make up about 70 percent of compensation costs, lifted by 0.5 percent last quarter, while benefits rose by 0.7 percent. From a year earlier, total compensation costs increased by 2.3 percent in Q3, unchanged from the second quarter's pace of annual growth. Wages and salaries expanded by 2.4 percent over the past twelve months and benefits rose by 2.3 percent. Overall, wage growth has been sluggish throughout most of the recovery but the recent uptick, albeit modest and perhaps helped by mandated state minimum wage increases, still suggests that the labor market has started to tighten (growing bargaining power of labor) and that employers will be forced to respond by raising pay to better compete for talent.
Elsewhere, the consumer sentiment index from the University of Michigan ended October at 87.2, down from the mid-month (flash) reading, below expectations, and the worst headline print in roughly a year. Under the hood, Americans’ views of both current and future economic conditions deteriorated this month, with the latter falling to a 2-year low. In fact, this was the first time since October 2014 that at least half of all surveyed consumers reported that they anticipate an economic downturn sometime in the next five years. However, Richard Curtin, director of the Michigan Survey of Consumers, stressed that “the October rise may simply reflect a temporary bout of uncertainty caused by the election,” but added that “prospects for renewed spending gains will depend on continued growth in jobs and wages as well as low inflation and interest rates.”
Sources: Econoday, Twitter, Bloomberg, ZH, U.S. Census Bureau, U.S. DoL, UoM, FRBSLPost author: Charles Couch