When all you read is gloom, turn here for a much different perspective.

Thursday, October 29, 2009

Q4 Growth Likely to be Stronger than Q3

Thursday we got another indication that the U.S. economy is returning to strong growth. The government's first estimate for the third quarter came in at a 3.5 percent annual pace.

Again most economists were wrong. The consensus was for only a 3.2% jump. In fact several analysts had actually lowered their estimates yesterday in advance of the report.

The quarter was the first to experience the positive effects of emergency government stimulus programs put in place earlier in the year.

Growth in consumer spending and confidence, which accounts for about 70 percent of the economy, contributed significantly to the rebound.

Purchases of durable goods, which include autos, jumped 22 percent, the biggest increase since 2001. The governments $3B Clunkermania program obviously contributed significantly to that huge durable goods jump. But what was perhaps more encouraging was the data that showed that even excluding sales, production and inventories of automobiles, the economy grew 1.9 percent in the quarter. The stimulus programs are acting as a catalyst and not just the only source of growth.

Many economists now agree that the recession ended earlier in the year. As we have said for quite sometime, when the National Bureau of Economic Research officially marks the recession's end, they will likely point to June 2009. And that prediction was made by professor Mark Hirschey back in November of 2008.

In the 3rd quarter, residential construction also jumped at a 23 percent annual rate. It was the first quarterly gain in almost four years and the largest jump since 1986.

The home-building market -- which as be ailing for several years -- surged as sales climbed, propelled in part by an $8,000 tax credit for first-time buyers. The credit (also part of the emergency stimulus past by the US government earlier this year) will likely be extended with the support of the majority of the Senate.

And Q3 earnings continue to be strong -- pointing to not only moderate growth in Q3 -- but extremely strong growth in Q4 and into 2010.

Amazon in particular has used the past year of recession to continue to decimate it's brick and mortar competition. Amazon, which is reorganizing the retail market value chain continues to produce strong results. “You should see more expansion in the categories we’re in, as well as more geographical expansion over time,” said Amazon's Chief Financial Officer Thomas Szkutak last Thursday.

In the overall manufacturing sector, total inventories in Q3 continue to drop precipitously. The only conclusion: factory production will need to keep pace with significant upward momentum.

As stockpiles decrease and demand continues to grow more factories will need to come back online quickly. The gains required to produce such output will now lead to a quick rebound in hiring.

In September, the unemployment rate likely reached it's peak and with growth now ramping significantly in the 4th quarter, overall job growth is just around the corner.

You'll remember that we warned back in August to not be surprised by robust Q3 growth. Don't be caught off guard again with Q4 growth that will prove to be even stronger.


  1. GNE,

    What do you make of all the pundits who say the 3rd quarter GDP was a fluke and folks like your friend at Postcards from Capetown who say fair value for the S&P 500 is about 860. Is the bull market history?

  2. Anonymous,

    It really is a very simple equation right now. $700B has started its injection into the economy. Have a look at how the $3B Clunker money translated into growth. Obviously the results will not be completely linear, but as those additional stimulus dollars continue to find their way into economic programs, growth will be quite strong for an extended period of time. It is not surprising that those folks (including Prieur) who called for a lackluster Q3 number, will call the result a fluke, but when Q4 comes in even stronger and as job growth begins, there will be no place to hide those of-base gloomy predictions.

    Based on every indication from quarterly company earnings, the value for the S&P right now is quite undervalued...

    See the top level analysis of why here:
    Break Neck Bounce

  3. GNE

    You seem to know more than Christina Roemer. She says the stimulus from this point forward will have a diminishing impact( until 2010 when it actually becomes negative). The biggest bang has already happened. Clunkers along with the home credit, simply stole demand from future quarters. Additionally, those who participated in the "cash for clunkers" are financially worse off. They are in debt with a higher car payment and higher insurance rates.

    You need to read Fredric Bastiat to understand the "seen and unseen"

    ISM BTW is a poor factor in determining GDP. From 2003 thru 2005 the ISM set a record for number of months above 60, yet GDP averaged barely 3% not the 4-5% the ISM would have predicted.

    A V recovery is not what we want. It would be a long term disaster.

  4. Anonymous,

    We will see. For the last several years, ISM has been right on. Don't know if they changed their methodologies, but this past year especially has been right on the mark.

    Not much of a fan of Fredric Bastiat. His quote that Governments have never learned anything from history, or acted on principles deducted from it, just does not ring true for me. In particular with respect to this recession compared to inaction in the Great Depression, world government action was significantly different.


  5. GNE,

    Aren't you concerned that the same folks who said the subprime problem wasn't big enough to sink the economy are the same ones who say that commercial real estate problems can be handled as well. My contacts in the industry say we are only 10% through the bad loans; prices have dropped 40% and are still falling. What makes you think the banks will be able to handle this without another big bailout?

  6. Anonymous,

    If indeed that is the case, then banks should work their way through those 90% "bad loans." With interest rates where they are right now, they should take the chance will the fed is flooding with liquidity at almost 0%, to re-write the notes. With respects to any ARMs or resets coming due currently, they are all resetting at rates below their origination rate.


  7. GNE,

    Most of the CRE loans written in the last few years were non-recourse. The borrowers are simply handing back the keys to the banks.

  8. It is a fact. If one does not want to hear depressing news re the economy, one has to tune to the Good Economist. One reads the local paper, it is trying to be positive, and nothing but gloom from its readers.At the end of the day, is economics a state of mind? Like any other aspect in life? You get what you percieve? Instead of being hopeful, happy and prayerful, these clucks are just groaning and moaning. Please, Joan Rivers,poke fun at them?


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