GDP: 3.0%; Durable Goods Consumption: +8.3%; Consumer Prices: +1.5%/ Sentiment: +5.6 points
In a Nutshell
“The hurricanes slowed some parts of the economy but boosted others and growth remained strong.”
What It Means
Most economists expected the hurricanes to cause the economic activity to moderate in the summer, but it didn’t a whole lot. Indeed, the growth rate was basically the same as in the spring. The strong increase was powered by robust business investment and additions to inventories as well as solid consumer demand. But in each of those categories, there is warning. Let’s start with business investment. Spending on intellectual property was good, but not great. Purchases of equipment were robust but firms didn’t build very much. The major addition to growth came from inventory building. Firms had been running lean and mean, so it is not clear if the increase in stocks was intended and whether it will be sustained. Inventories, by themselves, added nearly three-quarters of a percent to growth. Then there is the consumer spending number. Household demand for services was mediocre and spending on nondurable goods was okay. But what really drove things was a surge in durable goods demand. Much of that came from the huge September vehicle sales, which was likely the result of people replacing waterlogged vehicles. That is not sustainable. Finally, the trade deficit narrowed, adding to growth. But that was the result of imports declining and if the economy is really growing strongly, that is not something we should be seeing. As for inflation, it accelerated from second quarter levels, but it is hardly at a level that the Fed has to worry about.
The University of Michigan’s Consumer Sentiment index maintained its mid-month rise and posted a solid increase for the month. Both current conditions and expectations rose a similar amount, indicating the respondents were both happy about where they are right now as well as hopeful things will get even better.
Markets & Fed Policy Implications
So, did the hurricanes help or hurt growth? It is hard to really say. You can probably ascribe the large boost in durable goods demand to a hurricane rebound and maybe some of the inventory build was due to a lack of sales. But if sales faltered, then growth should have been down as well. And what about the decline in imports? That makes almost no sense. This was the first estimate of growth and the numbers frequently change significantly. I suspect that once we get the September trade data, we will likely see better imports, so growth may be revised downward. But I don’t expect a huge revision. The real question is what do these data imply for growth going forward? Again, it is hard to say. While durable goods spending is likely to fade, spending on services such as utilities was likely off due to the hurricanes and that could rebound. I have had the second half of the year growing at about a 2.5% pace and I still believe that is likely to be what we see. Regardless, this report has to buoy investors but also put the Fed members on edge. If growth were already faster than projected, what will be the situation if tax cuts (there will be little or no real reform) were implemented? Tax cuts create sugar highs and the risk to inflation is that it will accelerate. With energy prices and wages on the rise, the stage is set for higher inflation. Look for the Fed to do nothing at the next meeting, which begins on Tuesday, October 31st, but signal that it is ready to hike in December.