The U.S. economy is doing well
The GDP and jobless claims numbers for the U.S. came out today and they confirm the continued solid pace of recovery that has taken shape since Q2 began. GDP growth came in at a 3.5% annualized and initial jobless claims were 287,000, pushing the 4-week average down to another secular low of 281,000. Some comments below
My secular view of the American economy’s growth potential is cautious because of the still large household debt overhang, a lack of policy space and likely capital allocation distortions that are artificially boosting near-term growth at the expense of later growth. However, in the here and now, it is undeniable that the U.S. cyclical recovery is powering forward, with Q3 growth well ahead of expectations of 3.0% growth and adding to a prodigious 4.6% number from Q2.
Here’s how the U.S. Bureau of Economic Analysis reported it:
Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 3.5 percent in the third quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 4.6 percent.
The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by a negative contribution from private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.
When we look at GDP for Q3, what is notable, given the lack of wage growth to date, is that personal consumption expenditure growth was weak as should be expected. PCE increased at a 1.8% annualized rate, very much in line with the 2% medium-term growth potential I see for the U.S..
Consumption added 1.2% to GDP, while business investment contributed 0.7%, and net exports added 1.3%. Defense spending surged, adding 0.7% to GDP. Inventories subtracted 0.6% from GDP, which is positive because it says the uptick is not due to excess production that is sitting in inventories. Expectations for Q4 now run in the 2-3% annualized growth range. The IMF believes the U.S. could grow 3.1% in 2015 and 3.0% in 2016.
It is significant to note that real personal disposable income increased by 2.7% in Q3. With the drop in oil prices and in interest rates passing through to consumers, I expect personal disposable income growth for Q4 to be good, and to underpin good growth numbers.
Moreover, the fall in initial jobless claims to a level almost 20,000 below the 300,000 is immense. Irrespective of hiring trends, this low level of claims will also support recovery.
In some senses, you could make the argument that, now that government spending is no longer a drag on growth, we are moving into the hyper-growth phase of this cycle. I am not making that argument largely because of poor wage growth, but it bears noting that this is entirely plausible, especially to the degree that disposable incomes are boosted going forward by a decline in oil prices and by wage and job growth.
It’s hard to take a bearish view on the cyclical progress the U.S. economy is making. This is why the Fed has felt comfortable ending its QE program. The Fed has wanted to turn away from QE and move toward forward guidance as its main tool for policy in order to normalize economic policy. In that sense, the bar was very high for the Fed to change its charted path, this month’s market turbulence notwithstanding. Because monetary policy is heavily reliant on expectations to feed through, especially with a program like QE, we should view tapering as tightening. But so far, the Fed’s tightening bias has not derailed the economy. Right now, the U.S. economy is doing well.