Thursday, October 26, 2023

A big GDP number for Q3. Keep it ROLLIN'

Most of the economic data had been pretty good for the last few months, and it was expected that today's GDP report would show a good number. But I'm not sure a lot of people saw this number coming.

And when you dig into the report, you see that along with consumer spending being impressive between July and September, most other parts of the economy also improved.
The increase in consumer spending reflected increases in both services and goods. Within services, the leading contributors were housing and utilities, health care, financial services and insurance, and foodservices and accommodations. Within goods, the leading contributors to the increase were other nondurable goods (led by prescription drugs) as well as recreational goods and vehicles. The increase in private inventory investment reflected increases in manufacturing and retail trade. Within nonresidential fixed investment, a decrease in equipment was partly offset by increases in intellectual property products and structures.

Compared to the second quarter, the acceleration in real GDP in the third quarter reflected accelerations in consumer spending, private inventory investment, and federal government spending and upturns in exports and residential fixed investment. These movements were partly offset by a downturn in nonresidential fixed investment and a deceleration in state and local government spending. Imports turned up.

See that small green bar going above zero for the last quarter? That's the first increase in residential fixed investment (aka - new home building) in 2 1/2 years, indicating that the decline in that part of our economy may have bottomed out, even in the face of high interest rates.

And if you ask "what about inflation"? That also continues to trend the right way in Q3, especially in the "core" measure that takes out food and energy prices.

Let's also remember that gasoline prices have dropped by 30 cents a gallon nationwide over the last month, which portends for inflation levels to continue lower for October, and possibly for the Holiday shopping season. It is worth noting that disposable income growth didn't keep up with the torrid spending pace, which fell by 1.0% after inflation for Q3 while inflation-adjusted spending was increasing by 4.0%. This resulted in a drop in the savings rate for Q3 from 5.2% to 3.8%, which isn't a great sign. But due to strong disposable income growth in the first half of 2023, Americans are still saving above the 3.2% rate we saw for the last half of 2022, and the 3.3% average for last year. So Q4 seems crucial in seeing which way things go for both disposable incomes and savings, and the resulting prospects for growth in 2024.

But for now, things are still in a very good place. Real GDP growth is up nearly 3% compared to a year ago, and unemployment and inflation both are below 4%. Instead of aiming for an arbitrary 2% level of inflation, and costing us jobs and billions in unnecessariltyhigh interest rates, our policymakers should be trying to have the economy keep performing like it did in Q3 2023.

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