Markets & Finance

Vital Signs: Stronger Demand Should Boost Economy


On deck: home prices, consumer confidence, durable goods orders, new home sales, third-quarter GDP, personal income, employment costs

The headline economic report this week will be the Commerce Dept.'s first estimate of third-quarter economic growth. Real gross domestic product is expected to have grown at a 3.1% annual rate last quarter, based on the median forecast of economists surveyed by Action Economics. GDP growth has always been something of a backward-looking number, but this time the details of the report may hold some insight into how the recovery is shaping up.

That’s because recent monthly data suggest a much more balanced breakdown of the composition of growth than economists had expected a month or two ago. That is, more growth came from demand and less from inventories. Businesses had run down their stockpiles so fast that some growth in GDP was a good bet—even if overall spending stayed flat—as companies ramped up output in order to achieve a better balance with sales.

Businesses liquidated inventories at a record annual rate of $160 billion in the second quarter. That means overall output, measured by GDP, had fallen below overall demand by that same amount. Based on the recent path of manufacturing production, companies are acting to close that gap. Factory output in the third quarter rose at a 7.7% annual rate, the largest gain in 10 years. Much of that jump reflected surging auto production, but even excluding motor vehicles and parts, manufacturing output still rose at a 3.8% rate, the fastest in 3 years.

Stronger demand last quarter frustrated efforts to rebalance inventories. The drop in August inventories suggests another large drawdown of stockpiles last quarter, but that only raises the likelihood of continued output growth in coming quarters. Consumer spending appears to have increased at about a 3% annual rate. Strong retail sales outside of autos in August and September suggest that over half of that advance was unrelated to the cash-for-clunkers boost to car buying. Fourth-quarter consumer spending is sure to look weak, if only because of the dropoff in car sales, but the recent gains in nonauto spending raise hopes that holiday buying will not be the bust that some fear.

Last quarter's stronger demand wasn’t confined to consumers. Pickups in production and shipments of business equipment by U.S. producers, along with imports of capital goods, suggest a gain in business outlays for equipment and software, the first after six consecutive quarterly declines. Rising starts of single-family homes imply a solid increase outlays by homebuilders, the first in 3 years. Government is sure to add some punch, and exports and imports each rose strongly, pointing to rising demand both abroad and at home.

Of course, the key to a lasting recovery will be a return to job growth that will support consumer incomes and spending. Right now, the level of private-sector payrolls is the lowest in 10 years, but that suggests businesses have been overly aggressive in cutting their payrolls. If economists’ projections for economic growth in the 3% to 4% range in the next couple of quarters is on the mark, current payroll levels may quickly prove to be unsustainably low.

Here’s the weekly calendar, from Action Economics.

Top Economic Reports

Report

Date

Time

For

Median Estimate

Last Period

Consumer Confidence Index

Tuesday, Oct. 27

10:00 a.m.

October

54.3

53.1

Durable Goods Orders

Wednesday, Oct. 28

8:30 a.m.

September

1.4%

-2.4%

New Home Sales (Millions)

Wednesday, Oct. 28

10:00 a.m.

September

0.441

0.429

GDP (First Report)

Thursday, Oct. 29

8:30 a.m.

Q3

3.1%

-0.7%

GDP Price Index (First Report)

Thursday, Oct. 29

8:30 a.m.

Q3

1.4%

0.0%

Employment Cost Index

Friday, Oct. 30

8:30 a.m.

Q3

0.4%

0.4%

Personal Income

Friday, Oct. 30

8:30 a.m.

September

0.1%

0.2%

Personal Consumption Expenditures

Friday, Oct. 30

8:30 a.m.

September

-0.5%

1.3%

Chicago Purchasing Managers Index

Friday, Oct. 30

9:45 a.m.

October

48.0

46.1

Consumer Sentiment Index (Final)

Friday, Oct. 30

9:55 a.m.

October

71.4

69.4

Other Reports and Events

Report/ Event

Date

Time

For

Dallas Fed Survey

Monday, Oct. 26

10:30 a.m.

October

ICSC-UBS Store Sales

Tuesday, Oct. 27

7:45 a.m.

Oct 18-24

Johnson Redbook Weekly Store Sales

Tuesday, Oct. 27

8:55 a.m.

Oct. 18-24

S&P Case Shiller Home Price Index

Tuesday, Oct. 27

9:00 a.m.

August

Richmond Fed Survey

Tuesday, Oct. 27

10:00 a.m.

October

Mortgage Applications

Wednesday, Oct.28

7:00 a.m.

Oct. 18-24

Initial Unemployment Claims

Thursday, Oct. 29

8:30 a.m.

Oct. 18-24

Housing Vacancies

Thursday, Oct. 29

10:00 a.m.

Q2

Kansas City Fed Survey

Thursday, Oct. 29

11:00 a.m.

October


Soul Searcher
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

Sponsored Financial Commentaries

Sponsored Links

Buy a link now!

 
blog comments powered by Disqus