There were lots of important reports on the U.S. 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 by more than previously estimated. 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 3.5 percent in Q3. That was up from the second quarter’s 1.4 percent pace of expansion and the first growth reading above 3 percent since 2014. The significant upward revision (from 2.9 percent in the advance estimate) was due in part to stronger personal consumption expenditures (consumer spending), and an uptick in business investment in buildings and intellectual property. Inventories were little-changed from the previous downward revision, which suggests that U.S. businesses continued to sit on smaller piles of unwanted goods. Real gross domestic income (GDI) increased 4.8 percent in the third quarter, down from the prior revision but still a big jump from 0.7 percent in Q2 thanks to stronger corporate profits. While GDP growth in the third quarter was encouraging, it could prove to be an outlier for 2016, as growth was sluggish in the first half of the year and Q4 growth is currently projected to be only around 1.8-2.5 percent. Moreover, the U.S. economy has grown at a roughly 2.0 percent annual rate since the recession ended, marking the slowest average pace for any expansion in more than half a century. With consumer spending accounting for almost 70 percent of GDP, rising wages remain the key to faster economic growth in America.
Next, a report from the Department of Commerce showed that personal income for Americans was essentially unchanged in November, worse than the 0.3 percent gain economists had expected and the weakest month for income growth since February. Total personal consumption expenditures (PCE), i.e. consumer spending, rose by 0.2 percent ($24.0 billion) last month, also below expectations but still the 22nd monthly gain in a row. Altogether, personal saving as a percentage of disposable personal income (the personal saving rate) fell to 5.5 percent in November, not too surprising with the holiday shopping season starting to pick up and the sharp improvement in consumer sentiment following the election. Also included within this report are the PCE price indices, the Federal Reserve’s preferred measures of inflation. Both metrics cooled slightly in November and remained well below officials' 2.0 percent “target.” However, inflation pressures have clearly firmed over the past two years, and this could continue to be the case in 2017 with the increased fiscal spending expected from the incoming administration and the potential (long-awaited) uptick in wage growth.
Elsewhere, data from the Census Bureau showed that new orders for U.S.-manufactured durable goods (items meant to last at least three years) declined in November by $11.0 billion (4.6 percent) to $228.2 billion. That was worse than economists had anticipated, the largest month-over-month decline in more than two years, and enough to erase essentially all of the gains from October. However, the sharp move lower in the headline figure was related to an expected pullback from a (one-time) spike in non-military aircraft orders in the prior month. At the same time “core” durable goods orders, which exclude the volatile transportation component, rose by a healthy 0.5 percent in November, and orders for nondefense capital goods excluding aircraft, i.e. core capital expenditures, an important proxy for U.S. business investment, jumped by 0.9 percent. Those solid gains are a clear reflection of the post-election improvement in business sentiment.
Next, data from the Department of Labor showed that the number of Americans making first-time claims for unemployment benefits totaled 275K in the week ending December 17th. That was an increase of 21K from the prior week’s figure, the largest such gain since 2014, and the highest headline reading in six months. Although a disappointing report, the latest weekly claims figure could simply be related to seasonal volatility, which is why subsequent claims data will be more telling of whether this is just a temporary uptick or the start of a new trend. Either way this is one of the most important economic reports to regularly track because each of the past six recessions was preceded by a spike in initial claims. So far, though, there is still no reason for concern because this was the 94th weekly initial claims print below 300K in a row, one of the longest such streaks on record and a pattern believed to be consistent with an overall healthy labor market.
Elsewhere, the Federal Housing Finance Agency’s (FHFA’s) national home price index (HPI) rose by 0.4 percent in October (lagged). That was slightly below the gain economists had expected and the smallest monthly rise since June. As a result, year-over-year growth in home prices slid to 6.2 percent, the weakest reading since July but still well above the recovery average. Some economists like to compare the HPI to the owners' equivalent rent section of the monthly consumer price index (CPI) report from the U.S. Bureau of Labor Statistics to help spot price bubbles. As the second chart below shows, home values have increased significantly in recent years but remain below the extremes seen prior to the last recession. Going forward, the housing market faces several headwinds but inventories remain low, which means that home prices are likely not going to start falling sharply any time soon.
Finally, the Federal Reserve Bank of Kansas City’s composite manufacturing index showed that activity expanded at a faster pace this month in the Midwestern region of the country. Specifically, the headline index jumped to 11.0 in December, the 4th positive (expansionary) print in a row, the largest monthly gain since September, and the best reading in more than two years. Under the hood, gauges of nondurable goods production, shipments, new orders, order backlogs, and employment improved considerably in December, and expectations for future factory activity also increased. Comments from surveyed managers in the 10th Fed district were generally positive this month:
- “The election brings some hope for lifting costly regulatory burdens and improving productivity.”
- “We are continuing with significant capital spending, most aimed at improving efficiencies, enhancing quality, rationalizing labor or expanding capabilities.”
- “We saw a spike in activity after the election in November.”
Sources: Econoday, Bloomberg, WSJ, Twitter, ZH, U.S. Department of Commerce, U.S. Census Bureau, FRBKC, U.S. FHFA, FRBSLPost author: Charles Couch