The Commerce Department reported this morning that 3Q GDP surged to 3.6% (annual rate), up sharply from its initial estimate in November. The latest number is significantly above both the pre-report consensus of 3.1%, the advance estimate of 2.8% last month and the 2.5% recorded in the 2Q of this year. This is very unusual.
The government reported that the significant increase in 3Q GDP was due to increases in (in order): private inventory growth, consumer spending, exports, non-residential fixed investment and state and local spending. The only negative contributions in the 3Q were in federal government spending and imports.
Today’s report also noted that the change in real private inventories alone added 1.68% to the 3Q increase in GDP, after adding only 0.41% to the 2Q change. According to the report, private businesses increased inventories by a whopping $116.5 billion in the 3Q, following increases of only $56.6 billion in the 2Q and $42.2 billion in the 1Q.
The report did acknowledge that 3Q GDP – without the big increase in inventories – rose only 1.9% in the 3Q, compared to an increase of 2.1% (without inventory growth) in the 2Q.
So the question is: Why are businesses adding so dramatically to their inventories, if in fact they really are? It could be that companies expect demand will pick up in the future, so they are stocking their shelves in advance. But that seems odd what with consumer confidence plunging in recent months.
Or, it could be an indication that demand is weaker than expected, and goods are lingering on the shelves longer than planned as a result. Already this year, we’ve seen that back-to-school sales and Halloween sales were disappointing, which suggests that the unexpected accumulation in inventories is not good news.
Another sign that makes us question the aggressive build-up of inventories in the 3Q is the fact that businesses have been cutting back on their spending on new equipment in recent months. For much of the last year, businesses had been trying to boost productivity by using the latest technology to save labor. Unfortunately, they seem to be losing confidence in the future course of the economy and are putting equipment purchases on hold.
All of this suggests that the significant increase in inventories in the 3Q was: 1) simply overstated and will likely be revised lower next month; or 2) sales have been weaker than expected and goods are accumulating on retailers’ shelves. If it was simply overstated, the question is, why?
In any event, today’s surprising GDP report is not as positive as the headline number suggests. But as I cautioned in Tuesday’s E-Letter, that won’t stop President Obama and the Democrats from boasting that the economy is finally “fixed” and take all the credit for it.
They had better hurry because 4Q GDP is expected to be much weaker than the 3Q. GDP in the 4Q will be hurt not only by the expected drawdown in inventories, but also by the 16-day government shutdown in October. Forecasters suggest that those two factors alone could put 4Q GDP at only around 2%. The advance 4Q GDP report is expected in late January.
So no matter what you hear from the president, Dems and the mainstream media in the days just ahead, this economic recovery is still very weak by historical standards.
Finally, don’t forget that the November employment report will be out tomorrow. The pre-report consensus suggests that the headline unemployment rate will fall from 7.3% to 7.2%. If it does, expect to see more cheerleading by the president, Dems and the media.
But as always, it will depend on whether more new jobs were created last month, or whether it went down largely because more Americans stopped looking for work, and therefore weren’t counted as unemployed. Remember that there are still over 11 million Americans who can’t find work.
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