What inventory boosts give in the current quarter, inventory lack of boosts take from future quarters. At least that is what Goldman’s Jan Hatzius just stated in his note summarizing not only the just released Q3 GDP, but his first Q4 tracking forecast, which he cut from 2.0% to 1.5%.
BOTTOM LINE: GDP grew more quickly than expected in Q3, but the surprise came mainly from a larger-than-expected inventory contribution and a smaller-than-expected decline in government spending. Consumer spending and business fixed investment were less strong. Initial jobless claims declined as expected with no special distortions noted by the Labor Department. We started our Q4 GDP tracking estimate at 1.5%.
- GDP grew at a faster-than-expected 2.8% rate in Q3 (vs. consensus +2.0%). Personal consumption expenditures?the largest component of GDP?rose a modest 1.5% (vs consensus +1.6%), with strong growth in goods consumption offset by meager growth in services consumption. Business fixed investment increased at a disappointing 1.6% rate, with a 3.7% decline in equipment investment. Offsetting slightly disappointing PCE growth and sluggish business fixed investment, inventory accumulation contributed eight-tenths to headline growth, while federal government spending posted a smaller-than-expected 1.7% decline. (Federal spending has tended to show some degree of residual seasonality in recent years, with stronger growth in Q2 and Q3, and weaker growth in Q1 and Q4.) In addition, residential investment – which reflects new construction with a lag – rose a solid 14.6%. Stripping out the contribution from inventory investment, real final sales increased at a moderate 2.0% pace.
- In light of the composition of Q3 growth?driven by a substantial boost from inventories and a smaller-than-expected decline in government spending, we started our Q4 tracking at 1.5%, five-tenths below our prior assumption of 2.0%. Inventory investment tends to subtract from growth following quarters showing a positive contribution, while we expect the smaller-than-expected decline in Q3 government spending to result in even weaker Q4 spending than we had anticipated.
Which is great news for stocks: even more economic deterioration means even more BTFATH.