First Look at Third Quarter GDP Indicates Surprising Acceleration in Growth

Third quarter real GDP was stronger that expected, growing +3.9% annualized (consensus 3.1%), and surprisingly, at a faster pace than the 3.8% growth in the second quarter. This was the strongest growth since the first quarter of 2006. The improvement was due to growing exports (+16%), and stronger than expected consumer spending and business investment. Residential construction remains a drag on growth, falling for the seventh consecutive quarter, and declining a further 20% in the third quarter. This is the initial estimate of third quarter growth, and the figure will be revised over the next two months as more data becomes available.

Personal consumption growth more than doubled from the prior quarter, increasing by 3% versus 1.4%, in spite of the tightening lending standards in the mortgage market. Consumer spending is expected to slow in future quarters, as declining home prices reduce wealth. Business investment grew 7.9% on increased purchases of business equipment and software, as well as continued demand for commercial construction projects (+12%). The 5.9% increase on business equipment was the largest in a year and a half, and indicates that capex continues to grow.

The smallest trade deficit since 2003 was achieved through growing export demand as the dollar weakens. Companies like GE have seen a surge in demand for power plant equipment, and similar products around the world as global growth remains robust. Inventory growth added +.4% to GDP.

The inflation report was a mixed bag. The headline deflator rose considerably less than expected at +.8% (consensus +2%), and down notably from the +2.8% pace of the second quarter. This drop is due to technical factors tied to how the government accounts for rising import costs (which are counted as a negative for this figure). But Core PCE rose to 1.8% annualized from 1.4% the prior quarter, and was higher than the 1.5% consensus estimate. The core PCE, which excludes food and energy prices, is considered to be the Fed's preferred gauge of consumer inflation because it is the broadest measure, covering both goods and services. Today's figure leaves year-over-year core PCE at +1.9%, and within the Fed's desired 1-2% growth band.

Employment cost index growth remains stable, growing at +.8% versus +.9% in the second quarter. Over the past year, benefits and wages and salaries have risen around 3.5%.

Fourth quarter GDP now estimated to be around 1.75%.

Treasury prices sold off following the report on expectations this improves to odds of the Fed remaining on hold today, and not cutting rates again immediately following their 50bp "pre-emptive " cut last month.