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Monday Morning Coffee: Third quarter GDP exceeded expectations, but composition of data could mean weaker fourth quarter

11.02.14

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Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR. 

Overview

Third quarter GDP exceeded expectations, coming in at 3.5%, better than the expected 3.0% mark. There was solid growth in final demand, but likely unrepeatable performances in inventories, trade and government, which makes the outlook for the fourth quarter look weaker. The Federal Reserve ended its quantitative easing program, which seemed to have a positive effect on financial markets. Fears that financial markets would tighten without QE were quieted by a strong rise in equities late in the week. Fears that equities would fall because of the size of the Fed’s balance sheets are questionable anyway. Interest rates are not going to jump because the Fed stops buying U.S. Treasuries. Monetary policies are taking separate pathways. The Bank of Japan, the ECB and the People’s Bank of China are easing monetary policy, while the Federal Reserve is taking a big step towards transitioning from unconventional to conventional monetary policy by ending the QE program.

Last week’s data was mixed. Third quarter GDP rose at a respectable rate, but the composition of the data could mean a weaker fourth quarter. Durable goods and consumer spending showed the economy lost momentum in September. Next week we will see the first hard data for the fourth quarter through vehicle sales and employment. Data for the third quarter revisions will be unveiled through construction spending, factory orders and trade.

The economy appears to be on track to a sustainable 3% course. However, the economy appears to have a weak start to the quarter. The economy has had numerous ups and downs since the recovery started five years ago. The inconsistent nature of the recovery and the political brinkmanship has delayed hiring and investment. The midterm election could bring even more political uncertainty leading to the presidential election. Even with likely Republican gains, political environment will remain strained to do to strong divisions within the party.  The global economy’s weakness is another factor to watch carefully. Although the U.S. economy doesn’t depend on exports for growth, confidence and the development of financial market growth is connected to the global picture. The data continue to point towards a solid economy and should track near the 3% mark for the next few quarters.

Review of Last Week’s Data: October 27-31, 2014

The U.S. Economy:

On a seasonally adjusted annualized basis, the pending home sales index rose 0.3% to 105 in September, partly regaining the August decline. Potential home sales have been on their upward trend begun in early 2014. The index is still 1% above its year earlier level. Other housing indicators are pointing to a modest recovery.

The Conference Board’s index of consumer confidence reclaimed all of its ground lost in September and more in October. The index climbed 5.5 points to 94.5 in October, a seven year high. Both the present conditions and expectations indexes rose in October. The report corroborates the University of Michigan preliminary report for October and highlights a recovery in confidence that has accelerated from earlier in the year.

New orders for durable manufactured goods fell 1.3% in September. Weakness was broad-based. Orders for durable goods excluding transportation fell 0.2%. Core capital goods orders retreated 1.7%. Durable goods shipments rose 0.1%, a modest rebound considering they declined 1.8% the previous month. Details were downbeat, as orders for nearly every product segment outside of defense declined. Fundamentals are still supportive of business investment. Core capital shipments rose at annualized rate of 11.1% in the third quarter. We still think that business investment and hiring will increase in coming months.

The Federal Reserve ended its quantitative easing program as planned, but recommitted in keeping its federal funds rate at rock bottom for a “considerable time” after QE ends. Not changing the considerable time language is appropriate, as the Fed is six months-to-a-year away from raising the fed funds rate. The Fed changed its assessment of labor market under-utilization, describing it as diminishing. The Fed beefed up its discussion of inflation, acknowledging the drop in market based measures of inflation expectations. The Fed still believes that the drop in inflation is transitory. The Fed played the two-handed economist well, saying that if there is faster progress in achieving the committee’s objective of employment and inflation, than increases in the target range for the federal funds rate will take place sooner than currently anticipated. Conversely, they said that if progress is slower, increases in the federal funds rate will take place later than anticipated.

Real GDP grew by 3.5% in the third quarter, below the second quarter’s 4.6% advance in the second quarter. Personal consumption rose by 1.8%, with spending on durable goods up 7.2% and spending on nondurable goods up 1.1%. Real nonresidential fixed investment rose 5.5% in Q3, with equipment investment up 7.2% and structures investment up 3.8%. Real exports rose 7.8%, while imports fell 1.7%. Inventories rose by $62.8 billion. Final sales rose by 4.2% in the third quarter after a 3.2% advance in the second quarter. Despite the slowdown from the second quarter, the economy is growing near 3%. The economy has grown more than 3% in four out of the last five quarters, despite only rising 2.3% y/y in Q3. Businesses are ramping up and consumers are doing their part. Finals sales were strong. The nation’s economic prospects are improving. Growth in this recovery has faltered several times, but the economy is now much stronger. The momentum will continue.

The University of Michigan’s Consumer Sentiment Survey rose 2.3 points to a seven-year high of 86.9 in October. This was the final report of the month. Improved future optimism lifted the index, while current conditions lost a little ground. Confidence remains strong.

International:

Japanese industrial production rose 2.7% in September, the most since January and a sign that companies are recovering from the impact of a bigger sales tax. That trimmed the decline to 1.9% for the third quarter, following a drop of 3.8% in the second quarter. Prime Minister Shinzo Abe must decide whether the economy can bear another hike in the levy next year after the increase in April caused the sharpest economic decline in five years. Shipments rose 4.3% in September to the highest level in five year and inventories declined 0.8% from August, when they were at the highest level in more than five years. The economy is forecast to grow 3.4% in the third quarter after a 7.1% contraction following the April sales hike.

German business confidence dropped for a sixth month as recession threatens Europe’ largest economy. The IFO institute’s business climate index dropped to 103.2 in October from 104.7 in September, the lowest since December 2012. The German economy, which helped the euro-area emerge from it’s longest-ever slump last year, contracted in the second quarter and the Bundesbank projects little growth in the second half of the year.

German unemployment unexpectedly declined in October, dropping the most in six months in a sign the companies confidence is stronger than expected. The number of people out of work declined by 22,000 to 2.9 million in October. Despite weak recent economic data, the outlook for employment still looks solid. Although business sentiment has declined, the number of job openings is at the highest level in three years.

China’s manufacturing sector slowed further last month. The government’s PMI fell to 50.8 in October, below September’s 51.1 reading. Growth slowed in September for output, new export orders, stockpiles and expectations, according to the government statement. The central bank on September 30 relaxed mortgage rules for homebuyers who have paid of existing homes, in an effort to jump start the economy.

Important Data Releases This Week

Construction Spending will be released on Monday at 10:00 AM EST. We expect a decent 1.0% advance in construction spending. Recent housing data point to solid growth in single-family housing, but a slower multi-family gain. Nonresidential construction will make a modest advance and public construction is trading higher.

October ISM will be released on Monday at 10:00 AM EST. Manufacturing has posted solid gains over the past six months, but has begun to cool. We look for index to fall slightly from the September 56.6 mark. Manufacturing will remain healthy, but just brake a little from the Q3-57.6 average.

October Vehicle sales will be released on Monday at 5:00 PM EST. Vehicle sales have been impressive, but may be hitting some bumps, as pent-up demand will cool sometime soon. Still, sales will remain well above the 16 million mark.

September International Trade will be released on Tuesday at 8:30 AM EST. Export growth has been decent based on port data and imports will be weak because of lower oil prices.

Factory Orders will be released Tuesday at 10:00 AM EST. Factory orders will fall 1.0% based on the already released durable goods data. Business investment started Q3 on a solid footing, but ended on a weaker one. Business investment in equipment is still trending upwards.

October ADP Employment will be released on Wednesday at 8:15 AM EST. Based on payroll records, employment probably rose 210,000, up from 202,000 in August.

October ISM Non-manufacturing index will be released on Wednesday at 10:00 AM EST. The ISM index is projected to fall slightly in October, after averaging a solid 59 in Q3. The service sector still remains healthy.

Q3 Productivity and Costs will be released on Thursday at 8:30 AM EST. The third quarter likely saw a modest 1.9% gain in productivity and a small increase in costs.

October Employment Report will be released on Friday at 8:30 AM EST. October was a solid month for employment, with a projected 250,000 gain, near September’s 248,000 gain.

Author: Steve Graham


Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.

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