Q3 GDP Unchanged

Popular Economics Weekly 

FRED

The Commerce Department’s final estimate of third quarter U.S. economic growth was unchanged at 2.1 percent, as strong consumer spending was offset by weaker business investment and shrinking inventories.

Consumers were the difference, as they kept up spending at a 3.2 percent annual pace, which was not quite as strong as the second quarter’s very strong 4.6 percent rate but enough to counteract the drop in business investment and inventories. Companies are not restocking their shelves as if they expect things to improve next year, in other words.

In fact there was a significant decline in spending that would create future growth. Q3 investments in structures fell 2.3 percent and spending on equipment declined 9.9 percent.

Why? Corporate profits are declining. Adjusted pretax corporate profits were revised in the final estimate to show a -0.2 percent decline instead of a +0.2 percent increase. Profits have fallen 1.2 percent in the past year, suggesting that business investment is unlikely to accelerate anytime soon.

The Business Roundtable on Wednesday said an index that measures CEOs’ outlook for the economy fell for the seventh quarter in a row, adding to doubts about future growth. The index slipped 2.5 points to 76.7, a bit below its historic average, reports MarketWatch.

Once again CEOs are saying the trade fight with China is widely viewed to have weakened the global economy, dampened U.S. exports and hurt American manufacturers.

“CEOs remain cautious in the face of uncertainty over trade policy and an associated slowdown in global growth and the U.S. manufacturing sector, which is currently contracting,” said the Roundtable.

This is while another indicator of future growth was basically flat. 

“The US Leading Economic Index (LEI) was unchanged in November after three consecutive monthly declines. Strength in residential construction, financial markets, and consumers’ outlook offset weakness in manufacturing and labor markets,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “While the six-month growth rate of the LEI remains slightly negative, the Index suggests that economic growth is likely to stabilize around 2 percent in 2020.”

This is what happens when corporate profits decline. It has to mean CEOs will eventually cut back on hiring as well. Stocks are rallying to record highs on news that a Phase I trade agreement with China should be signed in January. But its details are extremely vague, as China says it doesn’t want to buy all the agricultural products that Trump is demanding to help him in his re-election, for starters.

That is to say, there are too many details to still be worked out. And there is so much geopolitical uncertainty that companies will have to deal with in the New Year—Brexit, the EU maybe in recession, Trump’s impeachment trial, Russian interference with the 2020 election, etc.

So lots to worry about. The CEOs are saying why not keep some cash on hand for the next rainy day?

Harlan Green © 2019

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