by Zach Bethune, Thomas Cooley and Peter Rupert
The BEA announced in the 3rd estimate that real GDP increased at a s.a.a.r. of 5.0% for 2014 Q3. This was the strongest quarterly growth rate in over a decade. It seems clear that the U.S. recovery is continuing apace and, if the economy is not held back by weak growth in Europe and the BRICS, we should continue to improve. A favorable sign is that personal consumption expenditures (PCE) contributed about half of the total, split pretty evenly between goods and services. Durable goods expenditures continued to be strong, increasing 9.2% after a 14.1% increase in the 2nd quarter.
How confident should we be that this expansion has legs?
Five percent growth is a healthy number and a good excuse for an extra glass of holiday cheer. It still makes sense, however, to view this recovery in the context of other business cycles. When we do, it is apparent that this economy is still climbing out of what was a very deep hole and very tepid recovery to date. The pictures below show the path of GDP, Consumption and Investment, in this recovery contrasted with the paths of other post-war business cycles. This makes it clear that, while things are looking better, we might want to keep the good champagne corked for a while longer. The fact that this recovery is set against the background of a world economy that is very feeble is a cause for tempering the optimism.
Another positive sign for the holiday is the report from the BLS today that, once again, initial claims for unemployment has declined. The 4-week moving average has been trending down and now is as low as at any time over the last several decades.
The picture below reprises a theme from our previous post. The U.S. recovery looks great when contrasted with Japan and Europe. The question is can we continue to sustain this progress when they are struggling? Economic linkages wax and wane as the terms of trade change between nations. Falling commodity prices have strengthened the U.S. dollar. Some trading partners have pushed down the value of their currencies. These contribute to keeping inflation low and this in turn helps domestic consumption. Most signs point to the recovery continuing to be robust but there are many moving parts to this picture and we will have to continue to watch them all.