Update: Second Estimate of Q3 GDP Shows More Growth

The second estimate of Q3 Real GDP, released today indicates that output grew slightly faster at 2.7% than previously estimated at 2%. On the face of it this seems like good news because it implies a more robust recovery than the earlier estimate. Unfortunately there are reasons to temper that optimism.  Much of the increase was due to an upward revision in the Q3  change in inventories which increased from$34 billion to $61 billion.  Unfortunately, these inventories could dampen growth in the fourth Quarter as firms work them off.  Net Exports were also revised upwards and added significantly to the increase in estimated GDP growth.

The fundamentals that we look to  for evidence of a robust recovery were not encouraging. Real consumption growth was revised downwards from 2% to 1.4% and real private non-residential investment declined 2.2% in the third quarter in contrast to the 3.6% increase in the second. There has been a lot of concern about the drop off in capital spending and many observers attribute it uncertainty about Europe and fiscal policy.  Whatever the reason, the consequences for future output growth cause for concern.

In a departure from our usual format we present many of the series in both per-capita terms and levels in the following graphs.

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Employment Snapshot – The New Positive

The Employment Situation released today from the BLS is being hailed by many as encouraging and  a positive sign the economy is picking up steam yet, as seen in the graph below, both the pace and the level of the recovery of the labor market are still well below the average from the previous four cycles. The report today shows non-farm payrolls increased 171,000 in October. The report also included upward back-revisions for August (192k from 142k…note that the revision was nearly 100k higher than the advance estimate!) and September (148k from 114k).  Employment gains were primarily attributed to service industries (+163K), led by retail trade (+36.4K) and health care (+32.5K). Goods producing industries increased over the month (+21K) after two consecutive months of decline. The market has responded relatively positive the past three employment reports despite the slow growth. For instance, last month the Dow increased .3% based on a reported employment gain of 114K. Comparatively, last October the market decreased 5% based on a similar increase of 112K jobs. What was once seen as weak, is now encouraging. From the same WSJ article above, John Silvia of Wells Fargo Securities says “Over the past three months, private-sector job gains have averaged 149,000, suggesting sustained growth even though the trend remains subpar”. As the graph below shows, the trend was the same last October as it is now. The difference is maybe the market as a whole is starting to believe 149K  is now the new long term trend. If this is the case, a 171K jobs number is certainly positive.

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