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Economic Watch: Overall Growth Revised Higher, Business Investment Up

The economy expanded more than previously estimated in the third quarter, and separate reports offered up some relatively positive economic news just in time for the holidays.

by Staff
December 22, 2016
Economic Watch: Overall Growth Revised Higher, Business Investment Up

 

6 min to read


The economy expanded more than previously estimated in the third quarter, and separate reports offered up some relatively positive economic news just in time for the holidays..

The nation’s gross domestic product, which measures the total output of goods and services, expanded at a rate of 3.5% in the third quarter of the year, according to the Commerce Department. This third and final estimate is up from a 3.2% rate estimated a month ago and a 2.9% estimate in late October.

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It's the best performance since the third quarter of 2014 and compares to a 1.4% rate in the second quarter of this year. The reading also beat a consensus estimate from analysts who forecast the GDP would be revised upward to a 3.3% rate.

The revised figure is based on more complete data that showed nonresidential fixed investment, personal consumption expenditures, and state and local government spending increased more than previously thought, according to the department.

“The data remains consistent with our view that underlying economic activity has strengthened over the second half of the year," said Nathan Janzen, senior economist at RBC Economics.

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However, he said, RBC analysts do not expect a repeat of the sizeable third quarter GDP gain in the fourth quarter. "A sizeable 0.9 of a percentage point addition to growth from net trade, much of which reflected a transitory jump in food exports, is unlikely to be repeated,” he explained. "And we expect a small subtraction, compared to a significant third quarter addition, from fourth quarter inventory growth.”

Despite this, RBC says it is forecasting a 2.1% annual gain in the fourth quarter GDP, led by further improvements in consumer spending, a pickup in residential investment, and a slightly stronger gain in business investment.

On a related note, a separate Commerce Department report showed consumer spending in November rose 0.2% following an upwardly revised 0.4% gain in October. When personal spending is adjusted for inflation, the increase was just 0.1%, far off an annual pace of 3% in the third quarter of the year.

This may be the first evidence that overall economic growth is slowing in the current quarter, but it's still expected to be better than it was in the first half of the year. Personal incomes, however, failed to gain for the first time in nine months, unchanged in November following an October gain of 0.5%.

Despite heightened expectations for a near-term pickup in the economy spurred by a stronger, more confident consumer focused on a new political regime and better economic conditions next year, the underlying support for the consumer sector remains fragile at best, according to Lindsey Piegza, chief economist at Stifel Fixed Income.

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“Expectations can help sustain current behavior, but the reality the consumer is facing at this point is still modest wage gains and a continued loss of momentum in income growth,” she said. “Throughout the holiday shopping season, retailers have had to rely on heavy discounts and price promotions to lure in shoppers. The foot traffic is there, but expenditures per person are under pressure.”

Durable Goods Orders Drop, Business Investment Jumps

Another Commerce Department report showed business investment in the U.S. increased in November, despite a decline in new orders for long-lasting durable goods.

Orders for non-defense capital goods excluding aircraft, a measure of business investment, surged 0.9% from the month before, more than analysts were expecting and the biggest increase since August. There were increases in orders for electrical equipment, appliances and components, as well as computers and electronic products, according to CNBC. A likely factor in the increase is the recent upturn in oil prices.

Shipments of these core capital goods rose 0.2% last month after falling 0.3% in October, while shipments of all durable goods in November rebounded 0.1% from the month before after falling 0.1% in October.

In contrast, total new orders for durable goods fell 4.9% in November from October, pulled lower by a 13.2% drop in new transportation orders. When those are excluded, November recorded a 0.5% improvement from the month before.

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In the first 11 months of 2016, total new durable goods orders are just 0.3% below the level from the same time in 2015, while shipments are only 0.8% below last year’s pace.

Leading Economic Indicators Stable, Expansion to Continue

Despite these generally better numbers, a look at where the economy is headed the next several months showed the trajectory is not any higher, but it’s also not any lower, according to one private research group.

The Conference Board’s Leading Economic Index for the U.S. was unchanged in November, remaining at 124.6, following a 0.1% increase in October and a 0.3% gain in September.

“The U.S. Leading Economic Index continued on an upward trend through 2016, although at a moderate pace of growth,” said Ataman Ozyildirim, director of business cycles and growth research at The Conference Board. “The underlying trends in the LEI suggest that the economy will continue expanding into the first half of 2017, but it’s unlikely to considerably accelerate.”

He said although the industrial and construction indicators held the U.S. LEI back in November, the weakness was offset by improvements in the interest rate spread (the difference between the average yield a financial institution receives from loans and the average rate it pays on deposits), initial unemployment insurance claims, and stock prices.

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The Conference Board’s Coincident Economic Index for the U.S., which measures current economic activity, increased 0.1% in November to 114.6, following a 0.2% gain in October, and a 0.2% improvement in September.

Existing Home Sales Best Since Since 2007

All these reports follow one from early in the week that showed the market for existing homes in the U.S. remains strong, according to the National Association of Realtors.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 0.7% in November to a seasonally adjusted annual rate of 5.61 million from a downwardly revised 5.57 million in October.

November's sales pace is now the highest since February 2007 and is 15.4% higher than a year ago.

Lawrence Yun, NAR chief economist, said it's been an outstanding three-month stretch for the housing market as 2016 nears the finish line.

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"The healthiest job market since the Great Recession and the anticipation of some buyers to close on a home before mortgage rates accurately rose from their historically low level have combined to drive sales higher in recent months," he said.

Single-family home sales, the largest share of the market, dropped 0.4% to a seasonally adjusted annual rate of 4.95 million in November from 4.97 million in October, but are still 16.2% above the pace a year ago. Existing condominium and co-op sales jumped 10% to a seasonally adjusted annual rate of 660,000 units in November, and are now 10% above a year ago.

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