Monday, 26 November 2012


Understanding the GDP paradox

Third quarter output set to look much stronger than fourth

By Steve Goldstein, MarketWatch
WASHINGTON (MarketWatch) — Like a stuffed turkey, the week after the Thanksgiving break is loaded with economic indicators, including an updated estimate of third-quarter gross domestic product that may be fattened up.
The GDP data, due Thursday, highlight the busy week of indicators, which also will show the latest reports on durable-goods orders, U.S. house prices, new-home sales, jobless claims, and personal income.
Expectations are for the third-quarter GDP data on Thursday to be revised up to 2.9%, from an initial estimate of 2%. And yet expectations for fourth-quarter GDP stand at miserly 1.6%, according to a MarketWatch-compiled consensus. (The fourth-quarter numbers may be unduly lofty simply because many economists just have not gotten around to adjusting those figures yet.)
Has the U.S. economy really changed that much between the end of summer and the autumn?
MarketWatch consensus
See economic calendar
date report Consensus previous
Nov. 27 Durable goods orders -0.5% 9.9%
Nov. 27 Consumer confidence 72.1 72.2
Nov. 28 New home sales 385,000 389,000
Nov. 29 Weekly jobless claims 395,000 410,000
Nov. 29 Q3 GDP, revision 2.8% 2.0%
Nov. 30 Personal income 0.2% 0.4%
Nov. 30 Consumer spending 0.0% 0.8%
Well, a little bit. But first, a look at some of the unusual factors driving the third-quarter.
One big surprise in the third quarter came from government spending on defense. That’s just not sustainable — Congress didn’t budget a 13% increase in defense spending for this calendar year, as the Commerce Department reported for the third quarter.
“Why we look for a weak fourth quarter is [because of] a reversal of unexpected strength in defense outlays,” said Ben Herzon of Macroeconomic Advisers in St. Louis. His firm forecasts that a reversal in government spending will shave 1.1 percentage points of growth in the fourth quarter.
There’s more. When the Commerce Department pegged third-quarter GDP at 2%, it didn’t yet have the complete data on inventories, trade and construction spending. Inventories and trade came in stronger than the government (as well as many private-sector economists) had anticipated, resulting in what will seem like a pretty good reading for GDP in the third quarter.
But rising inventories can be both good and bad. It’s good when businesses stockpile in anticipation of stronger demand. It’s bad when businesses see their stockpiles increase because they sold fewer goods than expected.
“It could be that final sales are unexpectedly weak, suggesting a cut in production is likely,” Herzon said.
And there really is a negative drag on the economy coming from fears of the so-called fiscal cliff of spending cuts and tax rises that are set for the beginning of the year unless Congress can find a way to prevent them.
Spending on equipment and software climbed an annualized 5% in the first half. It flattened out in the third quarter, and Macroeconomic Advisers is forecasting a 2% drop for the fourth quarter.
“If you’re a business thinking about expanding capacity, you might see how or whether the fiscal cliff will get resolved before doing so,” Herzon said.
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That’s why Tuesday’s data on durable-goods orders and Friday’s report on personal income will prove important.
The durable-goods report is always a tricky one to interpret, seeing how aircraft orders can generate such strong swings in the data.
Economists focus on a category called core capital goods orders, which exclude defense and aircraft. And the picture there isn’t pretty, falling on a monthly basis for three straight periods. Year-on-year growth was 1.1% in September, compared to 9.6% as recently as February.
“I wouldn’t be surprised to see orders fall even more, but if they do bounce back, I would count that as really good news,” Herzon said.
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Consumer spending by contrast has held up reasonably well, though expectations are for a bit of a slowdown. Macroeconomic Advisers see fourth-quarter personal consumption expenditure (the fancy phrase for consumer spending) slowing to an annualized 1.5% rate from 2% in the third quarter.
Put it all together, and the data from the third and fourth quarter really tell a similar story.
“Even when you take out defense spending, you have a mediocre economy with anxious businesses,” Herzon said.
Steve Goldstein is MarketWatch's Washington bureau chief.
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