Can’t see nothin’ in front of me. Can’t see nothin’ coming up behind. Make my way through this darkness, I can’t feel nothing but this chain that binds me. Lost track of how far I’ve gone, how far I’ve gone, how high I’ve climbed. On my back’s a sixty-pound stone, on my shoulder a half mile of line. Come on up for the rising. These lyrics start off the song, The Rising, the title track on Bruce Springsteen’s 2002 studio album The Rising, and was released as a single in 2002.
The American economy was operating as if it had a 60-pound stone on its back for most of the last decade. Overall growth was well below historical averages, wages were stagnant, and productivity growth minimal. Things have improved over the last two years with wages increasing modestly, growth surging past 3 percent and investment finally starting to pick up. But many indicators still suggest that the economy is not at full steam. The 3rd quarter GDP numbers, which were recently released by the Bureau of Economic Analysis, show that the rising is indeed occurring, but not to the level that many had predicted considering the scope of the recent tax reform.
According to this preliminary 3rd quarter estimate, real gross domestic product (GDP) increased at an annual rate of 3.5 percent following a 4.2 percent increase in the 2nd quarter. This actually exceeded most economists’ expectations, but fell below ours since we had expected that the tax reform and tax cut package would increase overall remittances and investment. Even so, a 3.5 percent increase in GDP is nothing to sneer at as it is the 16th highest quarterly growth rate of the 75 quarters so far this century.
While headline growth was good, most of it came from an increase in inventories. Actual investment in capital goods, equipment and houses fell for the first time since the 4th quarter of 2015. This was driven by a steep decline in construction both for commercial and residential buildings. Falling levels of investment signal problems in the future, and the last time investment fell off it really looked like the economy was about to turn down. Exports also fell for the first time in about 2 years, suggesting that countervailing duties being levied by China, the EU and other nations may be starting to bite.
Inventories are another story. Usually, growing levels of inventories suggest that there are no buyers for goods and are a big signal that a downturn is occurring. This quarter it is likely that inventory growth is due to stockpiling of products from China that may have had, or soon may have, hefty tariffs levied on them. The fact that imports rose by $75 billion and inventories by $113 billion suggests that this may be the case.
Without the changes in inventories, and netting out the effects of trade, the economy still grew at a rate of about 3.2 percent in the quarter, above the average for the decade. Particularly strong segments included health care, recreation, and importantly food service and accommodations. The food service segment is a great indicator of economic confidence, as families tend to eat out and restaurants more when they are feeling flush, and cut back quickly when times get tight.
On the other hand, segments like automobiles, transportation and energy were weak in the 3rd quarter.
Looking at incomes, disposable personal income is up by nearly 5.2 percent over last year, so it is growing faster than either GDP or inflation. Savings rates are relatively flat, and prices as measured by the GDP price deflator are growing at a modest 1.7 percent. All of this suggests that the economy is not overheating and that there is plenty of capacity for further growth even without a surge in investment.
Overall, the 3rd quarter GDP statistics suggest that the economy is still on a steady upward track in spite of a few trade issues. Nothing about these preliminary figures suggest that there are any serious problems with inflation, even though wages are up. That is not to say that there are not some black swans floating about that could cause the economy to falter, but at least for the coming year, this GDP report suggests that the rising is at an end.