Outside the Beltway

Economic Growth Was Slightly Better Over The Summer Than Initially Reported

The economy performed a little better than previously reported over the summer. It's not great, but it's probably enough to convince the Federal Reserve to raise interest rates next month.

Doug Mataconis · Tuesday, November 24, 2015 · 8 comments

After an initial report that seemed to suggest that economic growth over the summer was sluggish at best, the first revision to that report is somewhat more optimistic:

The American economy turned in a better performance last quarter than first thought, expanding at a 2.1 percent rate, the government said on Tuesday.

While well below the pace of growth recorded in the spring, it was better than the 1.5 percent rate for the third quarter that the Commerce Department reported late last month.

Much of the improvement was because of revised data on inventories, which showed businesses’ restocking shelves at a faster pace than the government first estimated. The improvement in inventory levels was offset by a slight downward revision in consumer spending last quarter.

Wall Street economists had been expecting the upward revision, which is the second of three estimates for growth that the government will release. The final set of numbers will come out on Dec. 22.

For all of 2015, the rate of economic growth is expected to be about 2.5 percent, not much different from the 2.4 percent rate in 2014.

The tepid pace prompted Jan Hatzius, chief economist at Goldman Sachs, to call this the “tortoise recovery” in a recent note to clients. But that sobriquet does not mean the economy has been uniformly lackluster.

“Yet while this expansion may go uncelebrated, growth in fact has been good enough to achieve a great deal of cumulative progress in the labor market,” he added. “We now expect that the U.S. economy will reach full employment within the next 12 months — the ‘tortoise recovery’ looks to be approaching the finishing line.”

Indeed, that is among the reasons policy makers at the Federal Reserve are more focused on the unemployment rate than the overall pace of gains in gross domestic product.

With the unemployment rate’s falling to 5 percent in October and employers’ bolstering payrolls by 271,000, Fed officials are likely to conclude when they meet next month that the economy is strong enough to handle the first increase in interest rates in nearly a decade.

Since the October jobs report, several Fed officials have signaled they see a rate increase coming very soon. On Saturday, the president of the San Francisco Fed, John Williams echoed that view.

“The data, I think, have been overall encouraging, especially on the labor market,” he said. “If that continues to happen, there’s a strong case to be made in December to raise rates.”

On Dec. 4, the Labor Department is scheduled to report data on unemployment and hiring in November, the last major piece of economic evidence the Fed is looking for ahead of its meeting on Dec. 15 and 16.

As the unemployment rate has fallen, there are signs that wages are finally beginning to pick up as well. That should help overall economic growth over the long term, especially if consumers who did not see gains earlier in the recovery finally have a bit more disposable income.

As Marketwatch notes, a good part of the reason for the growth in the third quarter was fact that inventory growth was quite strong, but that’s a factor unlikely to be repeated going into the final quarter of the year:

WASHINGTON (MarketWatch) — The U.S. economy grew faster in the third quarter than originally reported, though by no means at a breakneck pace.

Gross domestic product — the sum of the nation’s economy — rose at a 2.1% annual clip from July through September, fresh government figures show. Initially GDP was reported to have risen by 1.5%.

The upward revision in growth stemmed entirely from a bigger buildup in inventories. The value of newly produced but unsold goods was raised to $90.2 billion from an initial $56.8 billion.

Spending by consumers, the main engine of the economy, rose at a 3% rate, a few ticks lower than previously reported. Consumers spent a bit less on natural gas and phone-related services.

Buoyed by cheap gas and a steady supply of new jobs, more confident Americans are likely to spend at a moderate pace in the final three months of the year. As a result, economists predict GDP growth will speed up to 2.7% in the fourth quarter.

Still, the economy is on track to fall short of 3% growth for the 10th straight year, the longest stretch since the end of World War II. Although the U.S. is in its seventh year of expansion and the unemployment rate has fallen to 5%, the economy is performing well below its historical norm.

Businesses investment in the late summer and early fall, meanwhile, was mixed.

While spending on structures such as drilling rigs fell 7.1% — energy producers cut back after the plunge in oil prices — investment on business equipment jumped 9.5%.

One worrisome sign: Adjusted pretax corporate profits fell at a 1.1% annual rate, marking the third decline in the past four quarters. Companies are unlikely to spend and invest at current rates if profits continue to soften.

The nation’s trade deficit also widened in the third quarter, another negative for the nation’s economic health.

The Wall Street Journal emphasizes that this revision, while better than the initial report, doesn’t exactly point to a booming economy:

WASHINGTON—The U.S. economy expanded at a faster pace than initially estimated in the third quarter as businesses stocked up on more goods, suggesting the economy remains on track to close out the year with modest but unspectacular growth.

Gross domestic product, the broadest measure of goods and services produced across the economy, advanced at a 2.1% seasonally adjusted annual rate in the third quarter, the Commerce Department said Tuesday, up from the initial estimate of 1.5% growth. That matched the forecast of economists surveyed by The Wall Street Journal.

Despite the stronger performance, the growth pace from July through September marked a sharp slowdown from the second quarter, when the economy expanded at a 3.9% rate.

he third-quarter boost was largely due to a sharp upward revision for private inventories, which still weighed on GDP growth, but not nearly as much as initially estimated.

Rising stockpiles help boost gross domestic product, but they could be a potential drag in the fourth quarter when those inventories are drawn down.

“The key takeaway is that the inventory adjustment that has always been inevitable for the second half of the year is likely to drag out to two, or more, quarters rather than being concentrated primarily in the third quarter,” said Stephen Stanley, chief economist at Amherst Pierpont Securities, in a note to clients. “The movement in inventories basically just shuffles growth between Q3 and Q4.”

From a year earlier, the economy grew 2.2% in the third quarter, the slowest year-over-year advance since the first quarter of 2014. Overall, economic growth has hovered around a modest 2% rate for the past several years, with no sustained breakout for the economy since the end of the recession in 2009.

Meanwhile, the balance sheets of U.S. companies weakened in the third quarter. Corporate profits after tax, without inventory valuation and capital consumption adjustments, fell at a 3.2% pace from the second quarter, the biggest drop since the fourth quarter of 2014. On a year-over-year basis, corporate profit growth was 1.4%, compared with 8.5% year over year growth in the second quarter.

That measure of corporate profits tracks most closely with what companies report in earnings statements. Profit data aren’t inflation adjusted.

“Broadly speaking, we expect the outlook for corporate profits to remain challenging given the strong dollar, rising labor costs, more restrictive financial conditions, and weak external demand,” BNP Paribas economists Bricklin Dwyer and Laura Rosner said in a note to clients.

Tuesday’s report also showed business investment—reflecting spending on construction, equipment and research and development—was stronger than initially estimated. Nonresidential fixed investment rose at a 2.4% pace, compared with an earlier estimate of a 2.1% advance, as firms boosted spending on equipment.

Real final sales, a measure of economic output that excludes changes in inventories, increased at a 2.7% pace in the third quarter, down from an earlier estimate of 3% growth. The figure roughly measures the value of U.S.-made goods and services people and companies purchased at home and abroad.

(…)

Tuesday’s report will be the last read for Federal Reserve officials before their next meeting Dec. 15-16, when many economists expect the central bank to raise short-term interest rates for the first time in nearly a decade.

“Assuming that we continue to get good data on the economy, continue to get signs that we’re moving closer to achieving our goals” there is a strong case to be made in December to raise rates, Federal Reserve Bank of San Francisco President John Williams said Saturday.

The latest figures are unlikely to dissuade Federal Reserve officials from raising rates at their meeting next month, economists said.

“Although the recovery from the Great Recession has been disappointing at times, the positive flip side is that a six-year run of moderate growth has prevented the economy from overheating,” PNC senior economist Gus Faucher said in a note to clients. “There do not appear to be any serious imbalances in the domestic economy that would indicate a recession any time soon, although the global outlook is a downside risk.”

That last point in the Journal piece is really what makes this report important going forward. The Federal Reserve has been making clear for the better part of this year that they intend to raise interest rates at some point. Given the fact that rates have remained at historic lows since the Great Recession started, and were low even before before that, this is something that pretty much everyone has agreed was bound to happen at some point. The only question has been when it would happen. As the summer progressed, it appeared that the nation’s central bank would pull the trigger in September, but as that date got closer economic data, along with a market panic in China that spread around the world rather quickly, caused the Fed to o delay an expected rate increase, something it did again in October. In the weeks since then, though, various comments from the board, along with stronger economic data such as the most recent jobs report, have made a December rise seem more and more likely. The increase would be a modest one, of course, but it would set a new precedent for the bank and its impact on the economy and the markets is something we won’t know until it actually happens. At this point, the only thing that would seem to be likely to cause the Federal Reserve to hold back on raising rates would be a jobs report for November that is far less robust than more analysts are expecting.

The other impact of this report, and what it causes the Federal Reserve to do going forward, will of course be political. With the Presidential election now in a more active phase, every report like this has the potential to become political fodder for one side or the other, and if it ends up causing the Fed to raise rates that is likely to raise issues in both the Republican and Democratic race due to the potential impact that a rate increase could have on the economy as a whole, and on the stock market in particular. More so than at any other time in the past that I can recall, the Federal Reserve was an issue that received considerable attention at both of the last two Presidential debates, for example. Partly that is because the rise of the Tea Party has made monetary policy something of a more prominent issue in the GOP, although not always in the most constructive of ways. In any case, how the Federal Reserve acts, and how the economy performs, over the coming months, will be a big issue going forward. Today’s report is just another of the many data points that will have an impact on that debate.