3rd Qtr GDP Update Basically As Expected

Third quarter preliminary real GDP was revised up to +4.9% annualized from the original estimate of 3.9% annualized, as better quality data is obtained. This is the fastest quarterly growth in four years. For comparison, real GDP rose +3.8% annualized in the second quarter of 2007. Unfortunately, the fourth quarter is currently looking to see real GDP growth fall to below 1% annualized (a five year low). The real GDP figure represents the total output of goods and services of the US economy after adjusting for rising inflation. Year-over-year real GDP growth is running at 2.4% compared to 3.2% in the same quarter a year ago.

Factors which revised GDP higher were increasing exports (total +19%, goods only +26%) and rising inventories, as well as rising government expenditures at both the federal and state and local levels (defense +10%). Residential fixed investment (-20%) remains a significant detractor. Imports increased, and are recognized as a subtraction from GDP. Real imports rose 4.3% in the third quarter after falling 2.7% in the second quarter.

Though core PCE held steady at 1.8% annualized, the GDP price index rose to +.9% from +.8% previously.

Corporate profits were announced for the first time with this release for the third quarter. In the 3rd quarter profits from current production decreased by $19B after rising $95B in the 2nd quarter. Current production cash flow also went negative in the third quarter, as did taxes paid. Adjusting profits for taxes, capital expenditures and inventories, meant company profits were essentially unchanged for the quarter. Profits for financial companies were hit harder than other sectors, down 20.5% annualized. The 1.2% slide in profits from current production was the first drop since the fourth quarter of 2006. Year-on-year corporate profits growth slowed to 1.9% from 5.7%.

Another notable point was that income gains for the second quarter were revised lower from 5.3% to 3.8%. Labor income is under pressure, and may be just holding constant when adjusted for inflation, which will be a negative for consumer spending. Third quarter consumption was revised down to 2.7% from 3.0%.