US Economic Growth Revised Up to 5% for Third Quarter: Why Weren't Markets More Enthused?
12/23/2014 8:48 pm EST
There was a huge upward revision to the third quarter US economic growth rate today, but MoneyShow’s Jim Jubak thinks the financial markets didn't show profound enthusiasm because they doubt the growth rate in the fourth quarter will match that strength.
That was some revision. So why haven’t US financial markets been more excited today?
The US economy grew at a 5% annual rate in the third quarter, the Bureau of Economic Analysis announced this morning. That was a huge upward revision from the previous read of a 3.9% annual growth rate for US GDP.
Frequently, when the financial markets don’t react strongly to good headline news—the Dow Jones Industrial Average was up just 0.36% today and the Standard & Poor’s 500 was up 0.25%—it’s because they don’t believe the headline. I don’t think that’s the case here. If you dig down into the numbers below the headline 5% growth, they support that picture of very strong growth. For example, real final sales—a number that eliminates swings in inventory that can spike or depress GDP—was revised upward to 5% in the quarter from the prior 4.1%. That’s the largest increase in real final sales since the first quarter of 2006 when this measure jumped by 5.5%.
And it certainly wasn’t because the figures, as good as they were, lagged expectations from economists. Economists surveyed by Bloomberg were looking for a revision up to 4.3%.
No, I think the problem is that even a stupendous revision in third quarter GDP is ancient history. And when the financial markets look to the fourth quarter, they find reasons to doubt that the growth rate in that period will match the strength of the quarter that ended in September.
What leads to those doubts?
Durable goods orders unexpectedly dropped in November, for example, the Commerce Department reported today. A decline in the trade deficit—a function of falling oil prices and increased US production—added about 0.8 percentage points to growth in the third quarter. Will the economy get that kind of boost in the fourth quarter if global growth—and thus demand for US exports—slows? A surge in government spending, driven by a big increase in defense spending, added 0.7 percentage points to third quarter growth. That is unlikely to be repeated in the fourth quarter.
On the other hand, consumer spending, the engine of this big pick up in growth, might be even stronger in the fourth quarter. The drop in gas prices has gained momentum in the fourth quarter from the third quarter. And the drop in prices at the pump continues to put money into consumers’ pockets, acting to stimulate the economy just as a tax cut or a reduction in interest rates would.
The big open question as we get close to a report of fourth quarter GDP in January is, what kind of balance we’ll see between growth and the Federal Reserve’s decision on when to start raising interest rates. Strong fourth quarter growth that is too strong will raise worries that the Fed will move in April or so. Strong fourth quarter growth—that is strong, but not as strong as the growth in the second and third quarters of 2014—will let the market take a deep breath of relief: the first interest rate increase will come later rather than sooner. If growth is too weak, however, it will increase fears that oil prices will drop even further as US demand slows and that the US economy won’t be strong enough to pull the global economy ahead.
In other words, we’re waiting for Goldilocks again in January. And the financial markets aren’t certain that she will bounce through the door again.