The positive GDP report should help the market maintain its positive momentum in today’s session. Stocks have been steadily building on their record level in recent sessions, and today will likely be no different.
The second look at Q3 GDP came in better than expected – the expectation was for the originally reported +3.5% growth to get revised down to +3.3%; instead it went up to +3.9%. This follows the +4.6% growth in Q2 and the weather-beaten read in Q1. The revisions to the Q3 growth rate were broad-based, reflecting acceleration in all key components of the economy.
The biggest piece of the GDP pie, consumer spending or personal consumption expenditures, increased at a +2.2% pace in Q3, up from the original +1.8%. Spending was revised higher for both durables (+8.7% vs. +7.2%) and non-durables (+2.2% vs. +1.1%).
Overall consumer spending growth has been on the weak side lately. But the outlook is steadily improving as a result of the improving labor market, the wealth effect from the stock and housing markets and overall confidence gains.
[Listen to: Diane Coyle – GDP: A Brief But Affectionate History]
The investment picture looks a lot better in this second view of Q3 GDP as well, with both non-residential as well as residential spaces showing strong gains. Additionally, trade and inventories were relatively bigger growth contributors compared to initial estimates. Government spending used to be a drag in the last few years, but became a positive contributor in Q3 on strength in defense outlays. This second look shows government spending growth revised lower, but still relatively on the higher side at +4.2%. The unchanged +16% gain in defense spending isn’t sustainable and will likely come down in the current or following period.
All in all, this is a very good GDP report and will add to the growing conviction that the U.S. economic outlook is on firmer footing. It is this improving economic picture that prompted the Fed to end its bond-purchase program and is getting ready to start raising interest rates. The market’s ability to not get spooked by this imminent Fed policy change has been one of the most impressive features of this market. This trend appears firmly in place and shows no signs of slacking.
Related:
U.S. Sees Record Foreign Inflows As Economic Indicators Reach Decade Highs
