GDP Slows in Q3
Updated: Jul 27, 2022
Dear Clients and Friends,
We found ourselves a little extra jammed up recently, but we didn’t want to close out the week without giving you some insightful reading. So, for this weekend’s reading, we share with you an article written a few days ago by our good friend Sam Millette. This is a bit different than our monthly market risk update, but we chose it because he gives a good rundown of some important economic data recently released. Overall, Sam expects a minor slowing of the economy, which has been raging as of late.
Sam, floor is yours…
Last week, a number of important economic data releases gave us updates on consumer confidence, business spending, personal income and spending, and the third-quarter GDP report. The first look at third-quarter GDP growth showed that the pace of the economic recovery slowed during the quarter, largely driven by a slowdown in personal consumption growth. This will be another busy week for updates, with a focus on business confidence, the results from the Fed’s November meeting, and the October employment report.
Last Week’s News
On Tuesday, the Conference Board Consumer Confidence Index for October was released. Confidence increased during the month, as the index rose from an upwardly revised 109.8 in September to 113.8 in October. The forecasts were for a decline to 108. This report, marking the first increase for the index since June, left confidence well above pandemic lows. The improvement was likely driven in part by declining medical risks. Previously, during much of the summer and early fall, the rise of the Delta variant had weighed on confidence levels. Both the present situation and future expectation subindices improved in October. Consumers indicated they were more likely to buy big-ticket items such as cars and houses in October. Historically, improving consumer confidence has supported faster consumer spending growth, so the improvement in October is a welcome development. It may signal continued consumer spending growth.
Wednesday saw the release of the preliminary estimate of the September durable goods orders report. Durable goods orders declined by less than expected during the month, falling by 0.4 percent against calls for a 1.1 percent decline. The drop in headline orders was primarily driven by a decline in volatile aircraft orders. Core durable goods orders, which strip out the impact of transportation orders, increased by 0.4 percent in September, in line with economist estimates. Core durable goods orders are often viewed as a proxy for business investment, so the steady increase is an encouraging signal that businesses continued to spend. This report marks seven consecutive months with increasing core durable goods orders. Businesses have been investing in order to meet the surge in pent-up consumer demand throughout the year.
On Thursday, the advance estimate of third-quarter GDP growth was released. The economy grew at an annualized rate of 2 percent during the quarter. This result was lower than the 6.7 percent annualized growth rate in the second quarter and below economist estimates for a 2.6 percent annualized increase. Personal consumption slowed notably, falling from an annualized growth rate of 12 percent in the second quarter to 1.6 percent in the third quarter. Shortages, rising prices, and rising medical risks contributed to this slowdown. Despite these results, it should be noted that slower growth is still growth. Looking forward, economists anticipate a pickup in growth in the fourth quarter. A strong 5.7 percent increase in GDP growth for the full year is expected.
We finished the week with Friday’s release of the September personal income and personal spending reports. Personal income fell by 1 percent, a result below economist estimates for a 0.3 percent decline. Personal income growth has been volatile throughout the pandemic, as shifting federal stimulus and unemployment benefits have had an outsized impact of monthly income. The larger-than-expected decline in personal income in September was largely driven by the expiration of enhanced unemployment benefits at the start of the month. On the other hand, personal spending increased by 0.6 percent in September. This figure was down from the upwardly revised 1 percent spending growth in August but in line with economist estimates. This report marks seven consecutive months with personal spending growth. Throughout the year, personal spending has been supported by improving public health statistics and pent-up consumer demand following a year of pandemic-related restrictions.
What to Look Forward To
Monday saw the release of the ISM Manufacturing index for October. This widely followed measure of manufacturer confidence declined by less than expected, falling from 61.1 in September to 60.8 in October. The forecasts were for a decline to 60.5. This is a diffusion index, where values above 50 indicate expansion, so this result signals continued manufacturer growth despite the modest decline. Last year, manufacturer confidence increased notably following the expiration of initial lockdowns, and the index has stayed in expansionary territory since June 2020. Still, despite the healthy confidence levels, manufacturers have had to contend with rising headwinds throughout the year, most notably tangled global supply chains, labor shortages, and rising costs. Nonetheless, the continued strength of manufacturer confidence in October is an encouraging signal that producers view these obstacles as challenges that can be overcome.
On Wednesday, the ISM Services index for October will be released. Service sector confidence is expected to remain unchanged at 61.9 during the month. This is another diffusion index, where values above 50 indicate expansion, so the projected result would be a sign of steady growth for the service sector. As this sector accounts for the lion’s share of economic activity in the country, continued growth in October would be a positive indicator for overall economic growth. As was the case with manufacturing confidence, service sector confidence rebounded swiftly following the expiration of initial lockdowns last year and has remained in healthy expansionary territory ever since. Earlier in the year, service sector confidence saw a further boost, caused by the declining medical risks and easing of state and local restrictions. This allowed consumers to go out and spend heavily, especially in the first half of the year.
Wednesday will also see the release of the FOMC rate decision from the Fed’s scheduled November meeting. The Fed cut interest rates to virtually zero at the start of the pandemic, and economists do not anticipate any changes to interest rates this year. Instead, economists are focusing on the Fed’s asset purchase program, as an announcement regarding tapering purchases is expected at the meeting. The Fed has been purchasing $120 billion a month in Treasury and mortgage-backed securities throughout the pandemic, but a tapering program is widely expected. Most economists anticipate a reduction of $15 billion in purchases a month, which could lead to the end of the current quantitative easing program by next summer. This announcement will be widely monitored, as the removal of this supportive policy could cause market volatility. Still, given the widespread anticipations regarding this action, the market impact should be relatively muted unless there are surprises in the size and speed of the tapering efforts.
On Thursday, the September international trade report will be released. The trade deficit is expected to increase from $73.3 billion in August to $74.8 billion in September. If estimates hold, this report would mark the largest monthly trade deficit on record, breaking the record set in August. The advance report on the trade of goods showed that the goods trade deficit expanded from $88.2 billion to $96.3 billion due to a 4.7 percent drop in exports. The fall in exports was largely due to the impact from Hurricane Ida early in the month, but September also saw a 0.5 percent increase in goods imports. The trade deficit has been expanding throughout much of the year due to high domestic consumer demand and the uneven pace of the global economic recovery. International trade has been a drag on the pace of overall economic growth throughout the course of the year. So, until we see a meaningful increase in exports, this dynamic is expected to continue.
We’ll finish the week with Friday’s release of the October employment report. Economists expect to see 400,000 jobs added during the month, in a notable step up from the relatively disappointing 194,000 jobs gained in September. If estimates hold, this report would mark the 10th consecutive month with job growth. Nonetheless, the expected pace of job growth is slated to come in below the recent highs recorded during the summer. The underlying data is expected to show improvements in October. The unemployment rate is set to fall from 4.8 percent to 4.7 percent, while average hourly earnings are expected to show solid growth. We’ve made noted progress throughout the course of the year in getting people back to work, but the recent slowdown in hiring highlights the headwinds for the labor market recovery looking forward. A lack of available workers has led to labor shortages in some markets. This, in turn, has slowed the overall pace of hiring despite the fact that job openings are at or near all-time highs.
As discussed above, the Fed’s announcement yesterday 11/5 was obviously important. Here is a link to a short summary written by another good friend, Brad McMillan, Chief Investment Officer and Managing Principal at Commonwealth Financial.
Thank you, Sam, for allowing us to mooch off your article!
That’s it for now folks. Have a lovely weekend.
Matthew Ramer, AIF®
Principal, Financial Advisor
MOR Wealth Management, LLC
1801 Market Street, Suite 2435
Philadelphia, PA 19103
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