Surprise, surprise. Third quarter GDP growth was revised upward in the government’s third estimate. How can we be thinking of a recession next year? Oh yes, because it increases the likelihood that the Federal Reserve will continue to raise interest rates.
But US economic growth is surging now. What was originally the BEA’s initial estimate of growth was revised from 2.6 percent to 2.9 percent, and now in its third and final estimate is 3.2 percent, largely because consumers are continuing to spend into the holidays.
That should have been an easy call for economists, at least, who are supposed to understand what ingredients make up growth.
“The "third" estimate of GDP released today is based on more complete source data than were available for the "second" estimate issued last month,” said the BEA’s press release. “In the second estimate, the increase in real GDP was 2.9 percent. The updated estimates primarily reflected upward revisions to consumer spending and nonresidential fixed investment that were partly offset by a downward revision to private inventory investment.”
The increase in real GDP for the third quarter reflected increases in exports, consumer spending, nonresidential fixed investment, state and local government spending, and federal government spending, per the BEA.
The main engine of the economy, consumer spending, increased at a very good 2.3 percent annual rate in the third quarter. Previously the increase was reported at 1.7 percent.
There are other factors showing strong growth as well. Corporate profits were not as weak in the third quarter as initially reported. Adjusted pretax earnings were flat instead of down 1.1 percent, which means corporate profits are holding at the highest level as a percentage of GDP since 1950.
And initial jobless claims have sunk back to post-pandemic lows, signaling corporations are not yet downsizing their payrolls. The number of Americans who applied for unemployment benefits in the week before Christmas rose slightly to 216,000, but new filings remained low and show the labor market is still strong.
Why? Consumers are more optimistic about their future, as I reported recently, and it’s the holidays!
“Consumer confidence bounced back in December, reversing consecutive declines in October and November to reach its highest level since April 2022,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation and Expectations Indexes improved due to consumers’ more favorable view regarding the economy and jobs. Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus. Vacation intentions improved but plans to purchase homes and big-ticket appliances cooled further. “
Disposable personal income increased as well, by $242.4 billion, or 5.4 percent, in the third quarter, an upward revision of $6.6 billion from the previous estimate. Real disposable personal income increased 1.0 percent, an upward revision of 0.1 percentage point.
And lastly, the Atlanta Fed’s GPNow estimate of fourth quarter growth has been steadily revised downward, mostly because the housing market is already in recession, particularly due to lower new home sales and housing construction.
“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 is 2.7 percent on December 20, down from 2.8 percent on December 15. After this morning’s housing starts report from the US Census Bureau, the nowcast of fourth quarter real residential investment growth decreased from -21.2 percent to -21.5 percent.”
The engines of growth are still in place, but stocks are plunging again. The good news is seen as bad news by financial markets because the Fed isn’t looking at the real economy.
Harlan Green © 2022
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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