US Q3 GDP Second Estimate Preview: Stronger than predicted US growth

• Annualized GDP expected to be unchanged at 1.9% in the Reuters survey.
• Business investment was moribund in the third quarter.
• Stronger consumer spending in recent statistics may provide a boost to GDP.

The Bureau of Economic Analysis (BEA), a division of the US Commerce Department will issue its first revision (second release) of annualized third quarter gross domestic product (GDP) on Wednesday, November 27^th at 13:30 GMT, at 8:30 EDT.

Forecast

Third quarter annualized GDP is projected to be unchanged at 1.9%, Second quarter GDP was 2.0%. First quarter was 3.1%.

US GDP

The Bureau of Economic Analysis groups economic activity in four general categories: personal consumption, business investment, government spending and net exports.  

In the US consumer spending was about 69% of GDP in 2018, business investment was 18%, and government spending at all levels was 17%. 

In the BEA accounting exports add to GDP and imports subtract. The US has run a net trade deficit for about 30 years. Last year net exports were negative, that is the US imported more than it exported and the difference subtracted about 4% from GDP.

The decline in annualized US GDP from 3.1% in the first quarter to 2.0% in the second and 1.9% in the third quarter was largely a function of the substantial drop in business investment.

In the first three months of the year the non-defense capital goods category of durable goods, an oft used proxy for business spending averaged a 0.435% monthly increase. In the second quarter that declined to 1.167% and in the third quarter that became a 0.4% monthly decrease.

Consumer spending was relatively stable as was government expenditures.

Net exports did rise from a monthly average of -$52.16 billion in the first three months of the year to -$54.45 billion in the second quarter and -$53.85 billion in the third, largely the result of lower US exports due to the trade war with China.

GDP revisions

The BEA revises its GDP estimate twice at one month intervals from the original release. The initial release is called ‘advanced’, the first revision is called preliminary and the last revision is final. The final revision for third quarter GDP will be on December 20^th.  

Reuters

Historically GDP revisions are the rule. In the last five years every initial estimate has been adjusted by the final version, many have been revised twice. The scope of the changes vary widely from 1.6% in the second quarter of 2015 (2.3% to 3.9%) to 0.1% in the second quarter of this year (2.1% to 2.0%) but generally they are 0.5% or less.

Conclusion: Third quarter revisions

The current quarter will likely be no exception to the revision rule.

The Commerce Department’s quarterly services survey or QSS, issued on November 19^th implied stronger consumption growth in the quarter than the BEA had assumed when it complied the advanced GDP estimate.

The government assumed last month that spending in the service sector grew at a 2.9% annualized rate last quarter. But the QSS suggests consumption growth on the order of 3.0% to 3.2%.  If that proves accurate it could raise GDP as high as 2.3%.  

The Fed and the dollar

The Federal Reserve has repeatedly cited the overall health of the US economy in its monetary policy decisions. The 0.75% reduction in the fed funds rate since July was justified as insurance that the expansion stayed on track.  Now that the threats from the trade war with China and Brexit seem to be subsiding, the obvious health of the economy indicates the policy was successful.

Stronger US economic growth will lend the dollar a second boost after the end of the Fed’s insurance campaign provided the first.