The Commerce Department’s final cut at third-quarter GDP growth showed an economy growing at a 2.6% annual rate of growth (revised from a 2.5% rate estimated last month), a bit short of market expectations at 2.8%. In similar fashion, the 5.6% increase in existing home sales for November came in slightly below market forecasts averaging 7%. After a spate of consensus-beating economic data over recent weeks, Wednesday’s data “misses” are not terribly significant, in our view, and not inconsistent with hopes for a quickening pace to economic growth in 2011. True, the downward revision to consumer spending on services (from a 2.5% rate estimated one month ago to 1.6% in today’s release) is disappointing, a continuation of the lackluster trend in spending on services. In fact, after 15 months of economic recovery, this biggest of consumer spending categories, at more than 45% of total GDP, is still not quite to a 1% year-over-year rate of increase, a staggeringly slow recovery when you compare it with previous postwar recessions.
Nonetheless, tomorrow’s personal income and spending data for November should confirm that Q4 economic growth will probably exceed the Q3 rate, particularly at the final sales level. An increase in business inventories during the third quarter accounted for fully 1.6% of the total 2.6% GDP growth rate, and this magnitude of increase will surely not be repeated. But consumer spending has perked up, business spending should make another respectable contribution to growth, as will the net export sector by virtue of being less bad the in Q3. Residential construction also figures to be less of a detractor from growth. Growth in the 3% range, which might finally be enough to generate more jobs, is expected.
Despite the mixed readings in today’s economic data, major stock market indexes continued pushing to new two-year highs in light trading Wednesday. All of the major market averages – Dow, Nasdaq, S&P 500, S&P MidCaps and S&P SmallCaps – closed Wednesday at levels that were at least two-year highs, up anywhere from 0.1% (Nasdaq) to 0.3% (S&P 500) for the day and as much 132% (S&P SmallCaps) from their 2009 lows. For the S&P 500, the 86% price-only advance since March 2009 constitutes the best 21-month rally since the 1930s, one that has arisen out of the ashes of the two big bear market of the past decade. Economic and corporate fundamentals are not all we would like them to be, and the process of unwinding the debt excesses of the last 10 years has a long way to go. What’s more, as yesterday’s census numbers showed, the U.S. is battling against a demographic tide that is working to restrain growth. At the same time, the fact that the 2000-10 decade was seen the slowest growth rate for any decade since the 1930s, 0.9% a year, should hardly be a surprise to anyone watching the Commerce Department macroeconomic estimates on a regular basis.
Bonds took a bit of a hit today, giving back some of Tuesday’s gains. The 10-year T-note declined one-third point today, putting it up two basis points for the week to date. Based on today’s flash estimate, the Barclays aggregate U.S. bond index is essentially unchanged for the week. Crude oil futures prices pushed past $90 a barrel today for the first time since April, copper futures hit a record high of $4.29 a pound during the day, while the price of gold was slightly lower.
INVESTMENT OUTLOOK…Despite the recent escalation in inflation expectations and recurring credit anxiety in Europe, a respectable year-end rally has been fashioned out of improvement in leading economic indicators and perhaps a sense that the two parties in Washington may be able to come together and get something positive done in 2011. It is important to remember that at some point the U.S. economy will have to do without the trillion dollar stimulus packages – past and prospective – that have been contributing to the quickening seen in economic activity. In the end, strong corporate earnings can overcome a lot of this market’s shortcomings, and the profits outlook for 2011 is improving with the better economic prospects.
Michael Flament (203-783-4360) <a href=mailto:email@example.com>firstname.lastname@example.org</a>