Strong Third Quarter but Weak Consumption Ahead

The economy continues to struggle, giving the Fed reason to consider additional stimulus.

The third quarter of 2013 proved to be much stronger than many economists expected, led by an impressive buildup in inventories, according to a report from Lindsey M. Piegza, managing director and chief economist at Sterne Agee. Going forward, however, the stockpile of goods that has been built is likely to contract from production in the current quarter, exacerbating the weakness at the end of the year, she predicts.

“The largest component of the economy, the consumer, continues to retract, suggesting retailers are right to brace for a lackluster holiday spending season,” she says. “And, businesses continue to cut back on investment, drawing down spending on structures, equipment and labor.  These details reveal the economy continues to struggle, further justifying the Fed’s continued push to provide additional stimulus.  The Fed’s economic projection of above trend growth and stable labor markets, which prompted taper talk months ago, has been met with a much harsher reality.”  

The Job Situation

Initial jobless claims fell 9k from 345k to 336k in the week ending November 2nd, she reports.  The prior week’s claims were revised up 5k from 340k to 345k.  The four-week moving average dropped from 357k to 348k.

Continuing claims rose slightly from 2.86M to 2.87M in the week ending October 26th.  

“After a pop in claims in early October that all but reversed the outsized declines the month before, jobless claims have since settled back within the 330-350k range,” she states. “Taking a longer view, Jobless claims continue to steadily decline, albeit at a relatively slow pace.  Although, regardless of the slope, lesser job destruction is a welcomed step in the right direction.  The second part of the equation of course is job creation which remains frustratingly tepid.  The October NFP report is expected to rise just 120k following September’s disappointing rise of 148k.” 

Consumption

She notes that third-quarter GDP rose 2.8%, an unexpectedly strong reading compared to the consensus forecast of 2.0%.

This is the second consecutive +2% quarter of growth following a 2.5% increase in Q2.  Headline growth was led predominantly by a larger-than-expected increase in inventories, while consumer spending slowed to the weakest pace since 2011 and investment held relatively steady.  

Personal consumption rose just 1.5% in Q3, less than the consensus forecast and three-tenths behind Q2.  While headline growth appears impressive, this is the second consecutive quarter of decline in spending since consumption peaked at 2.3% at the start of the year.  Since then consumers have slowly pulled back with spending dropping to 1.8% in Q2 and now just 1.5% in Q3.  

The vast majority of the decline was centered around services with a rise of just 0.1%, the weakest quarterly reading since Q2 2009.  Goods consumption rose 4.3% compared to 3.1% in Q2 reflecting in part American’s strong demand for autos against the backdrop of cheap financing costs.  

Investment rose 9.5%, three-tenths above second-quarter’s pace.  Noticeable differences include a 1.6% increase in nonresidential investment compared to a near 5% increase at the end of the first half of the year, and a 3.7% decline in equipment spending in Q3 more than offsetting the 3.3% rise in Q2 and subtracting two-tenths of a percent from headline growth, the most in a year.  Structures spending also slipped from 17.6% in Q2 to +12.3% in Q3.  

On the stronger side, investment in intellectual property increased 2.2% in Q3 compared to a 1.5% decline in Q2 but still slightly below the 2.9% average quarterly rise in 2012.

Inventories rose more than expected from $56.6bn in Q2 to $86.0bn in Q3, the largest rise in more than a year. 

Trade

Exports rose 4.5% compared to an 8.0% increase in Q2.  Service exports declined to less than 1% compared to a 3.5% pace in H1 2013.  Imports rose 1.9%, about a fourth the rise in Q2 thanks to a significant decline in goods imports up just 1.8% in Q3 compared to 7.5% in Q2.  

Government spending rose 0.2% in the third quarter of the year, the first positive quarter of contribution since Q3 2012.  A 1.5% increase in state and local spending in Q3 more than offset a 1.7% decline in federal level spending.  Federal spending has contracted from headline growth for the past four consecutive quarters.  

On net, excluding inventory growth, real final sales rose 2.0%, down just one-tenth from Q3. Excluding inventory and trade, final sales to domestic purchasers rose 1.7% compared to 2.1% in Q2 and 0.5% at the start of 2013. 

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