Remember the “year of two halves”?
Even the folks who didn’t see a double-dip figured that the second half would be slower than the first half, thanks to the stimulus and other headwinds. Well Q3 was stronger than Q2 and now everyone is cranking up their Q4 outlooks.
Data since last Friday have caused us to revise back up our forecast for the current quarter. It also appears that Q3 real GDP, last reported at 2.5%, will be revised higher, as well. Late last week we learned that the trade deficit in October fell 13% in the month. We believe some of this is due to faulty seasonal factors—the trade deficit has shrunk in October in each of the past five years. However, this is simply payback from earlier in the year, when net exports were probably artificially depressing measured GDP growth. Recall that imports surged at a near 34% annualized rate in Q2, causing net exports to “subtract” three and half percentage points off of GDP. Even allowing for substantial payback in November and December, this still means that net exports are likely to “add” about 0.8% to the current quarter. November retail sales were also better than expected—the headline increased 0.8% and there were substantial upward revisions to the previous two months.
This caused us to lift our forecast of real consumer spending a couple of tenths to 3.2%. Taking the net exports and retail sales data combined, we are going to lift current quarter real GDP from 2.7% to 3.5%. The only reason why we are not higher is because it appears that Q3 real GDP will be revised up when the final revision is released next Wednesday. Recent data on manufacturing and wholesale inventories add nearly $20 billion to Q3 output versus what we assumed in the preliminary release. This means the inventory build last quarter was around $146 billion.
Current quarter inventory building is now expected to come in around $100 billion. We are not making any changes beyond the current quarter with respect to real GDP. For us to become more bullish, we need to see the labour market improve more noticeably. We believe we are getting closer to that point. According to the latest Business Roundtable CEO Economic Survey, expected employment 6 months forward increased to its highest reading in the 8 year history of the survey. Small business hiring intentions also appear to have begun to turn modestly higher.
Bottom line: It’s been a year of two halves, with the second half stronger than the first.
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