Fri Oct 27 07:30:00 CDT 2017

Consensus Consensus Range Actual Previous
Real GDP - Q/Q change - SAAR 2.5% 1.9% to 2.9% 3.0% 3.1%
GDP price index - Q/Q change - SAAR 1.6% 1.5% to 1.9% 2.2% 1.0%
Real Consumer Spending – Q/Q change – SAAR 2.3% 1.8% to 2.7% 2.4% 3.3%
Real Govt Spending - Q/Q change - SAAR -0.1% -0.2%

A rise in inventories, likely the result of hurricanes, gave a boost to third-quarter GDP, at an inflation-adjusted 3.0 percent annualized rate which tops Econoday's high estimate. Transportation snags and backup in the supply chain may have given a boost to inventories which rose $35.8 billion in the quarter and contributed 0.73 percentage points to the quarter's GDP.

But the core of the report is solid led by personal consumption expenditures which came in at a roughly as expected 2.4 percent pace and contributed 1.62 points to the quarter. Durable spending was very strong, at 8.3 percent and reflecting, at least in part, hurricane replacement demand for vehicles.

Residential investment was one of the few weaknesses, falling at a 6.0 percent pace, with nonresidential investment rising at a respectable 3.9 percent rate. Net exports are a plus, narrowing nearly $20 billion to a $595.5 billion deficit and adding 0.41 points to the quarter. Price data are back in trend following a dip in the second quarter, at 2.2 percent overall and 1.7 percent excluding food & energy.

The rise in inventories would be a concern if demand was softening, but demand is steady and any inventory overhang is likely to be drawn down during the fourth quarter. Final sales, which exclude inventories, came in at a respectable 2.3 percent. This is a solid report that points to steady momentum going into the fourth quarter.

In a special note on Hurricanes Harvey and Irma, the Bureau of Economic Analysis can't estimate the net impact on GDP but it is releasing preliminary estimates of disaster losses: at $121.0 billion for privately-owned fixed assets. Note that Hurricane Maria which hit Puerto Rico is not assessed in the GDP report which excludes territories.

Market Consensus Before Announcement
Despite the heavy hurricanes, third-quarter GDP is expected to slow to a still respectable 2.5 percent annualized rate from the second quarter's very solid 3.1 percent. Consumer spending, seen at 2.3 percent vs 3.3 percent in the prior quarter, was mixed in the third quarter but will get a lift from vehicle replacement demand following Hurricanes Harvey and Irma. Business investment appeared solid but could soften from prior strength with net exports likely to contribute to growth. The GDP price index is seen rising to a 1.6 percent rate vs 1.0 percent in the second quarter.

Gross Domestic Product represents the total value of the country's production during the period and consists of the purchases of domestically-produced goods and services by individuals, businesses, foreigners and government entities. Data are available in nominal and real (inflation-adjusted) dollars, as well as in index form. Economists and market players always monitor the real growth rates generated by the GDP quantity index or the real dollar value. The quantity index measures inflation-adjusted activity, but we are more accustomed to looking at dollar values.

Household purchases are counted in personal consumption expenditures -- durable goods (such as furniture and cars), nondurable goods (such as clothing and food) and services (such as banking, education and transportation). Private housing purchases are classified as residential investment. Businesses invest in nonresidential structures, durable equipment and computer software. Inventories at all stages of production are counted as investment. Only inventory changes, not levels, are added to GDP.

Net exports equal the sum of exports less imports. Exports are the purchases by foreigners of goods and services produced in the United States. Imports represent domestic purchases of foreign-produced goods and services and must be deducted from the calculation of GDP. Government purchases of goods and services are the compensation of government employees and purchases from businesses and abroad. Data show the portion attributed to consumption and investment. Government outlays for transfer payments or interest payments are not included in GDP.

The GDP price index is a comprehensive indicator of inflation. It is typically lower than the consumer price index because investment goods (which are in the GDP price index but not the CPI) tend to have lower rates of inflation than consumer goods and services. Note that contributions of each component, as averaged over the prior year, are tracked in the table below (components do not exactly sum to total due to chain-weighted methodology). Consumption expenditures, otherwise known as consumer spending, has over history been steadily making up an increasing share of GDP.

GDP is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Investors in the stock market like to see healthy economic growth because robust business activity translates to higher corporate profits. Bond investors are more highly sensitive to inflation and robust economic activity could potentially pave the road to inflation. By tracking economic data such as GDP, investors will know what the economic backdrop is for these markets and their portfolios.

The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Gross domestic product is the country's most comprehensive economic scorecard.

When gross domestic product expands more (less) rapidly that its potential, bond prices fall (rise). Healthy GDP growth usually translates into strong corporate earnings, which bode well for the stock market.

The four major categories of GDP -- personal consumption expenditures, investment, net exports and government -- all reveal important information about the economy and should be monitored separately. One can thus determine the strengths and weaknesses of the economy in order to assess alternatives and make appropriate financial investment decisions.

Economists and financial market participants monitor final sales -- GDP less the change in business inventories. When final sales are growing faster than inventories, this points to increases in production in months ahead. Conversely, when final sales are growing more slowly than inventories, they signal a slowdown in production.

It is useful to distinguish between private demand versus growth in government expenditures. Market players discount growth in the government sector because it depends on fiscal policy rather than economic conditions.

Market participants view increased expenditures on investment favorably because they expand the productive capacity of the country. This means that we can produce more without inciting inflationary pressures.

Net exports are a drag on total GDP because the United States regularly imports more than it exports, that is, net exports are in deficit. When the net export deficit becomes less negative, it adds to growth because a smaller amount is subtracted from GDP. When the deficit widens, it subtracts even more from GDP.

Gross domestic product is subject to some quarterly volatility, so it is appropriate to follow year-over-year percent changes, to smooth out this variation.