Q3 GDP Revised To 3.5% On Higher Consumer, Government Spending; Financial Profits Surge

In the third and final estimate of Q3 GDP, the BEA reported that real gross domestic product increased 3.5% in the third quarter of 2016, above the 3.3% expected . The growth rate was 0.3% higher than the “second” estimate released in November, when it printed 3.2%, and well above the first estimate of 2.9% from two months ago.

However, a quick read beneath the lines shows that, as shown prior, the bulk of the growth was driven by a surge in soybean exports, which contributed 1% of total GDP growth. Add spending on utilities (i.e. air condition bills) and inventories, which contributed 0.5% of the bottom line growth print, and that covers more than half of the 3.5% GDP print the quarter.

The revised growth estimate, the fastest in two years, reflected updated figures on research and development expenses from companies, spending by nonprofit institutions and use of financial services. The upward revision to third-quarter GDP growth reflected upward revisions to business investment, to consumer spending, and to state and local government spending. In the second quarter, real GDP rose 1.4%. However, the economy is unlikely to sustain such a pace in the final three months of the year, when it is expected to slow down to 2.2% SAAR, according to the median estimate.

On a year over year basis, GDP grew 1.7%.

The increase in real GDP partly reflected an increase in consumer spending on services, notably on housing and utilities. Consumer spending on durable goods also increased, notably on motor vehicles and parts. However, spending on nondurable goods declined. Overall, Personal Consumption Expenditures contributed 2.03% of the bottom line annualized GDP print, up from 1.9% last quarter.  As a result, spending, which account for almost 70 percent of the economy, grew at a 3% annualized rate, stronger than the 2.8% pace previously estimated, and was driven largely by increased spending on services..

While the spike in personal consumption will be a welcome sign, it begs the question how much was pulled forward from the Q4 GDP print, which is expected to slow down notably to around 2.0%

Exports of goods increased, notably in foods, feeds, and beverages and in consumer durable goods. Exports of services increased, mainly in travel. In addition, private inventory investment and federal government spending increased.

As a reminder, the biggest contributor to the Q3 jump was a surge in exports, mostly in the form of Soybeans, which contributed $50 billion of the annualized $144 billion Q3 increase.

Net trade contributed a total of 0.85% in the third quarter. Offsetting these contributions to growth, investment in equipment and in residential housing declined.

Fixed investment was revised just fractionally higher, printing at 0.02% thus ending the series of 3 consecutive quarters of negative prints. Corporate spending on equipment decreased at a 4.5% annualized pace in the third quarter, compared with the 4.8% drag previously estimated, and subtracted 0.3 percentage point from growth, the report showed.

Final sales to domestic purchasers increased at a 2.1% rate, compared with the prior estimate of a 1.7% pace.

Corporate profits increased 5.8% at a quarterly rate in the third quarter after decreasing 0.6% in the second quarter. Profits of domestic nonfinancial corporations increased 5.7 percent after decreasing 4.6
percent. The biggest contributor to the growh was profits of domestic financial corporations which soared 11.3 percent after rising 1.3 percent. 

Profits from the rest of the world were nearly unchanged after increasing 10.3 percent. Over the last 4 quarters, corporate profits increased 2.1 percent.