Goldman On GDP: Stronger Number Driven By Ongoing Inventory Investment, Real Final Sales Weak
From Goldman Sachs:
GDP Growth Firmer Due to Inventory Investment; State and Local Pressures Slow Employment Costs
BOTTOM LINE: Q3 growth in line with consensus expectations-but slightly higher than ours due to faster-than-expected inventory accumulation. Growth in real final sales was a touch weaker than expected, due mainly to another large trade drag. Consumption growth was healthy, though slower than we thought, while federal government outlays and business fixed investment (mainly construction) were higher. Meanwhile, moderation in employment costs reflects budget pressures of state and local sector.
- Real GDP +2.0% in Q3 (qoq, annualized, +3.1% yoy) vs. GS +1.5%, median forecast +2.0%.
- GDP price index +2.3% in Q3 (qoq, annualized, +1.2% yoy) vs. GS and median forecast +1.8%.
- Core PCE price index +0.8% in Q3 (qoq, annualized, +1.3% yoy) vs. GS +1.2%, median forecast +1.0%.
- Employment cost index +0.4% in Q3 (qoq, +1.9% yoy) vs. GS +0.4%, median forecast +0.5%.
1. The economy grew at a 2% annual rate according to the preliminary official estimate. This was right in line with the median expectation and somewhat higher than our 1.5% figure. However, most of the upside surprise was due to inventory accumulation-inventories rose by $115.5bn, contributing 1.4 percentage point to the headline figure. Meanwhile, real final sales only grew only 0.6%, a touch less than we thought and underlining the softness of this recovery.
2. Within final sales, private consumption grew at a healthy 2.6%-broadly shared across goods and services spending. Federal government spending (up 8.8%) and business fixed investment (up 0.8%) were firmer than we had expected. The latter was mainly due to stronger construction spending. The trade balance, however, again disappointed-as imports continued to surge but growth in exports slowed-subtracting 2 percentage points from Q3 growth.
3. Price indexes surprised on both sides. The GDP price index rose a stiffer-than-expected 2.3% while the core index of prices for personal consumption rose only 0.8%. The reasons for these larger-than-normal surprises are not immediately clear, though deflation of oil imports is probably at the root of the higher-than-expected GDP price index.
4. The employment cost index moderated further in the third quarter as total compensation in the government (state and local) sector flattened. This flattening reflects an unprecedented 0.3% decline in wages and salaries (the only other setback in the 29-year history of the series was a 0.1% drop in the third quarter of 2009) coupled with a 0.7% increase in benefits (that's essentially in line with the past couple of years but slower than was the case prior to the recession). Compensation trends in private industry were essentially unchanged from the second quarter: +0.4% on wages, +0.5% on benefits.