Yes, the headline seasonally adjusted annual rate real GDP figure was stronger than expected at 3.5 percent versus expectations for 3.3 percent. That would appear to be a good thing. Not to mention there was a larger than expected cooling of consumer price pressures (inflation). But looking a bit deeper into the data, the picture becomes a bit more blurry. Like a Picasso painting, you can see whatever you want to see.
What drove GDP? To start with the positive piece, consumption. Of the 3.5 percent headline, consumption was 2.69 percent of the print. The consumer showed up with its wallet open in the third quarter. After that data point, the data becomes a bit more blurry. Inventories, which are highly volatile, contributed 2.03 percent of the 3.5 percent, and net exports, which represent the drag from imports, subtracted 1.78 percent. Both of these are wildly volatile and tend to reverse from large contributions in coming quarters. So, it should be expected that inventories will be a drag to coming GDP reports and net exports should be less of a drag or even a contributor.
In many ways, it was a bit of a confounding GDP report. Did economic growth decelerate from the second quarter to the third quarter? The answer: it depends on the data that is chosen to be looked at in the release. The seasonally adjusted annual rate of real GDP growth certainly decelerated. Other portions of the data showed the opposite though.
But climbing under the hood more begins to bring a bit focus to the underlying data. Looking at year-on-year nominal GDP growth, GDP increased from 5.3 percent to 5.5 percent. Not a tremendous pick-up but higher nonetheless. Granted, this is likely the peak for nominal GDP given the underlying contributors and more difficult comparisons in the fourth quarter and next year. Still not a bad print, and—if price pressures had not disappointed and declined so much from the second quarter—nominal GDP would have been higher.
Since inventories and imports were such a distortion to the data, it is worth stripping them out to get a better look at the underlying health of the U.S. economy. Enter the “final sales” (eliminates inventories) and “final sales to domestic purchasers” (eliminates inventories and net exports) data from the most recent report. These are measures that provide a clearer view of the demand for products, and when the data is this effect by inventories and net exports a clearer view of the fundamental health of the economy.
Final sales to domestic purchasers is the best measure of the fundamentals of the U.S. economic health given its focus on domestic demand. Final sales dipped only marginally and final sales to domestic purchasers actually picked-up steam. In other words, the underlying U.S. economy continues to do well and has even accelerated recently. A far different picture than the headline data is relaying.
Samuel E. Rines is the chief economist at Avalon Advisors in Houston, Texas.