At 8:22 a.m. on Saturday morning, @realDonaldTrump greeted the world with this observation: “Very little reporting about the GREAT GDP numbers announced yesterday (3.0 despite the big hurricane hits). Best consecutive Q’s in years!” – Hat tip: Politico.
Our president may wish to revisit the National Income and Product Accounts (NIPA) methodology. He may start with a history lesson about Simon Kuznets who is best known for his studies of national income and its components. Kuznets was a Russian-born American economist and statistician who won the 1971 Nobel Prize for Economics. One may only speculate if Kuznets would have made it into the US today. Readers may want to know more about the father of GDP accounting. Google will do the rest for you. Readers may wish to read the NY Times obituary (July 11, 1985) of this Nobel Laureate for an exquisite history lesson by Nicholas Kristof.
Note that this 3% number is a first estimate of the quarter, and such early estimates are notorious for the revisions that almost always follow. Also, the 3% number is an annualized figure from a quarterly statistic, as is always the case with GDP. So was Q3 really the best in years?
In the details, we find that inventories grew. Imports strangely fell. And the hurricanes caused a pop in automobiles as flooded cars were replaced. A better indication gleaned from this data release is that domestic demand grew at about 2%, which is consistent with the slow-growth economy we have been experiencing. Meanwhile, inflation measures remain subdued and well under the targeted 2% number that the Fed has sought and found elusive for years (without providing a clear explanation as to why 2% has been so hard to attain). The core Personal Consumption Expenditure (PCE) deflator was 1.3%. That is a long way from the Fed’s 2% target.
Meanwhile, the Fed is hell-bent on raising rates a quarter point before yearend, and the market is anticipating that rate hike. The Fed will simultaneously commence shrinking its balance sheet. The first stage is underway with a $10 billion-a-month reduction that will eventually grow to a monthly $50 billion. At the initial $10 billion level, the market impact is benign. We shall see if pressures develop over the next year as the Fed persists on a dual track of balance sheet shrinkage and interest rate hikes. It is hard to see how such a path lowers market-driven interest rates – the odds favor higher rates. But slower economic growth, at about 2%, and a low inflation rate of well under 2% hamper this upward rate trajectory. This dual policy of balance sheet shrinkage and interest rate increases has never been tried before in American monetary history. Stay tuned.