Monday
Morning Outlook
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
We
were too high on inventories as well as government purchases, and that made our
overall forecast too high. However, our estimates of consumer spending,
business investment, home building, and the trade balance were all pretty darn
close to the mark. Final sales (GDP excluding inventories) grew at a 3.2%
annualized rate.
So,
while we missed on overall GDP, the underlying pace of final sales to the
private sector made it clear that the economy did not need more government
spending, temporary Keynesian-style tax cuts or more quantitative easing.
Now,
once again we have added up the major parts of GDP and are forecasting…a 3.5%
annual pace of growth in Q4. Be aware up front, however, that our
predictions for consumer spending, business investment and home building are
quite modest. Much of the growth we see in Q4 is due to our forecast that
a surprising drop in business inventories during Q3 will be offset by a rebound
in Q4. Another check on the forecast is that hours worked in the private
sector were up at a 3% annual rate in Q4, so even modest productivity growth
(growth in output per hour) suggests more than 3% increases in output.
Consumption: Auto sales
were up at a 36% annual rate in Q4 while retail sales ex-autos were up at a
5.1% rate. Services, a major part of consumption, are not up as much, but
it looks like real personal consumption – goods and services combined –
probably climbed at a 2.3% annual rate in Q4, contributing 1.6 points to the
real GDP growth rate. (2.3 times the consumption share of GDP, which is 71%, equals
1.6.)
Business
Investment: Business
investment in equipment and software as well as commercial construction appear
to have grown at an annualized 5% rate in Q4. This should add about 0.5
points to the real GDP growth rate. (5 times the business investment share
of GDP, which is 10%, equals 0.5.)
Home
Building:
Residential construction appears to have grown at about a 5% annual rate in
Q4. This translates into 0.1 point for the real GDP growth rate. (5
times the home building share of GDP, which is 2%, equals 0.1.)
Government:
Due
to the wind-down of operations in Iraq, defense outlays were unusually soft in
Q4. So, despite signs of a bottom in government construction – think
schools and bridges – real government purchases shrank at about a 3.5% rate in
Q4, which should subtract about 0.7 percentage points from the real GDP growth
rate. (-3.5 times the government purchase share of GDP, which is
20%, equals -0.7).
Trade: In the last
five years, the trade sector has added an average of 1.2 points to the real GDP
growth rate in Q4. We probably won’t get the same size boost this time,
but do expect a modest add of about 0.3 points on the growth of real GDP.
Inventories:
As
always, inventories are a wild card. Inventories actually fell in Q3, which
is rare for an economic expansion. We think businesses were way too
cautious. They didn’t want to get caught holding too much merchandise just
in case the pessimists were right about a “double-dip” recession. Now that
it’s clear they were wrong, we look for a solid build to inventories in Q4 of
about $55 billion at an annual rate. This translates into an additional
1.7 points for real GDP growth.
Add-em-up
and you get 3.5% real GDP growth for Q4, although with final sales (GDP
excluding inventories) growing at a more modest 1.8% pace.
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