Quick Note on US GDP on October 30, 2019

The Bureau of Economic Analysis released its ‘first stab’ at calculating 3Q 2019 GDP (Gross Domestic Product) this morning (10/30/2019). It estimates/estimated the US economy grew at a 1.9% annualized rate last quarter. This was slightly higher than “Wall Street’s” 1.6% estimate.

Key takeaways are:

  • Personal Consumption Expenditures remained healthy at a 2.9% annualized clip.
    • Expenditures on finished products grew at a 5.5% rate
    • Expenditures on services grew at a 1.7% rate.
  • Private Domestic Investment actually shrank 1.5% (annualized) during 3Q
    • Structural investment fell at a whopping 15.3% pace
    • Equipment expenditures also dipped 3.8%
    • Intellectual property products (software, etc.) grew nicely at around 6.6% annualized
    • Residential (real estate) investment also grew 5.1%
    • Inventory growth shrank slightly from 2Q
  • Due to the stronger US dollar, imports grew faster than exports, as the trade deficit was an 8 basis point lag on the entire GDP equation
  • Government purchases increased at a 2.0% annualized pace
    • Federal expenditures were up 3.4%
    • State & Local expenditures increased at a 1.1% rate

In aggregate, the data does NOT suggest the Fed needs to be too aggressive in cutting the overnight lending target. However, there are some segments of the economy which might be (or have been) in an unofficial recession, namely both Structural and Residential investment. Despite the 5.1% growth rate last quarter, Residential investment has been in the red 6 of the last 8 quarters. For its part, Structural investment has lagged 4 of the last 5, with some gaudy drops the last quarters. Further, equipment purchases have been MUCH softer in 2019, after a pretty robust 6.8% growth rate in 2018.

Given the relative strength of the US consumer, as evidenced by a miserly official Unemployment Rate and higher Labor Force Participation Rate, this little softening in economic activity has the feel of the deceleration in 2000 when Private Domestic Investment waned after Y2K, and the consumer was ‘strong’ enough to steer us through a very mild recession in 2001, actually the mildest official recession since 1900. Fortunately, the stock market is NOWHERE NEAR as overvalued now as it was then.

So, is the Fed engineering the somewhat ‘mythical’ soft landing? We will see how the remainder of the week shakes out.



John Norris