Headline growth masks waning momentum

October 30, 2014 07:34 AM

Third-quarter GDP rose 3.5%, surpassing the median expectation of 3.0% on Bloomberg, and pulling the average growth rate up from 1.25% in the first half of the year up to 2% over the first nine months of the year.

In the details, consumption rose 1.8% in Q3 just shy of the 1.9% rise expected, but a noticeable pullback from a 2.5% spending pace in Q2.

Goods consumption rose 3.1% in Q3 relative to a 5.9% pace last quarter, although service expenditures rose 1.1% in Q3, which was slightly more than the 0.9% rise from April to June.

Investment rose 1.0% in Q3, a very disappointing increase after a near 20% gain in the second quarter. Nearly every category of spending slipped between July and September with businesses still hesitant to invest in equipment, structures and full- time employees.

Fixed investment rose 4.7% in Q3 relative to a 9.5% increase in Q2, thanks to a lackluster 1.8% increase in residential spending. Non-residential investment rose 5.5% in Q3 with a 3.8% increase in structures and a 7.2% rise in equipment spending.

From a trade standpoint, exports rose at a slower 7.8% pace relative to a 11.1% increase in Q2 which more than offset a 9.2% decline at the start of the year. Imports, on the other hand, fell 1.7% in Q3, the first quarterly decline since Q1 of 2013. The US consumer remains under pressure, limiting demand for domestic and foreign made goods alike.

Government spending rose 4.6% in the third quarter, the largest increase since Q2 2009.

And finally, inventories grew at a modestly slower pace, up $62.8B in Q3 relative to $84.8B increase in Q2.

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Bottom Line: Headline growth was stronger than expected in the third quarter of the year, raising expectations for continued momentum in the final, fourth quarter of 2014 and beyond. Momentum, however, will come from organic job and income growth spurring increased consumption and investment activity. Keep in mind, even with impressive headline growth, the composition of third-quarter activity suggests a continued decline in investment and consumption in Q3 relative to Q2, and with international growth weakening, expectations for further support from exports and manufacturing at year end are quickly fading. While we hate to burst a perfectly good 3.5% bubble, this morning's report did little more than confirm what we've been expecting for some time--modest growth in Q3 followed by further weakness at the end of the year, translating into a sub-2% growth rate for 2014.

Also this morning, jobless claims rose 3k to 287k in the week ending Oct 25.

About the Author

Lindsey is the Chief Economist for Sterne Agee, specializing in the research and analysis of economic trends and activity, world economies, financial markets and fiscal policies. In addition to more than 10 years of experience, Piegza has published several academic papers in journals such as Harvard Business Review as well as in textbooks published by the Kellogg Graduate School of Management. Often quoted in the business press, Piegza is a regular guest on CNBC and Fox Business as well as national radio and other business news outlets.