November 29, 2012
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Q3 GDP Upward Revision is Impressive But Masks Soft Demand Conditions.
Real GDP of the US economy is now estimated to have risen at a 2.7% annual in the third quarter, a far cry from the advance estimate of a 2.0% increase. Although encouraging on the surface, the revisions mask some important weaknesses.
- Growth in consumer spending was revised down to a 1.4% annual pace in the third quarter, from the initial estimate of 2.0%. Real disposable income advanced only 0.5% in the third quarter (down from +0.8% in the advance report) after a 3.1% jump in the second quarter. This bodes poorly for consumer spending going forward.
- The inventories component accounted for a large part of the upward revision ($61.3 billion vs. $34.1 billion in the advance report). The major implication is that inventories will most likely subtract from real GDP growth in the fourth quarter.
- Exports are now shown to have grown 1.1%, while the advance estimate reported a 1.6% decline. As a result of this favorable revision, the trade gap narrowed to $403 billion in the third quarter, the smallest deficit in the past year. Given slowing economic growth in Europe and China, it is not clear that this level can be sustained.
Incoming economic data point to a noticeably softer pace of activity in the fourth quarter (+1.3%). These numbers are supportive of expectations of an expansion of the current quantitative easing program to include purchases of Treasury securities when the Fed meets on December 11-12.