US GDP preview - 4% here we come?

• US Q3 GDP expected to moderate but remain strong.
• Median forecast is 3.3%, with a range from 2.5% to 4.4%.
• Higher than usual impact with the equity picture.

The US Department of Commerce will release its first estimate of the annualized gross domestic product for the third quarter on Friday, October 26th at 12:30 GMT, 8:30 am EDT. 

Following the excellent 4.2% performance in the second quarter, most analysts expect a moderation with the Atlanta Fed GDPNow model projecting 3.9%.  If the figure meets estimates it would be the best two quarters for the US economy since mid-2015. The figure will be revised twice at one-month intervals.

Markets

A robust American economy may help to allay some of the concerns that have driven US equities back to January levels. Particularly prominent is the fear that rising US interest rates will cut into economic growth. However, GDP is a two-edged sword for stocks. The better the US GDP growth the greater the odds that the Federal Reserve will stick to its current rate estimate of four increases to the end of 2019. 

The recent dollar dominance has been fostered as much by European problems, Brexit and the Italian budget dispute, and emerging markets woes, as by US strengths. Federal Reserve rate policy by now is a long-standing fact. Confirmation of a healthy and expanding American economy will return some of the focus to the dollar and should provide additional support in the weeks ahead.

Credit market yields have eased somewhat after their rapid rise this year. The generic 10-Year Treasury was down to 3.13% as of this writing (9:20 am Thursday, October 25) having topped at 3.26% two weeks ago. Although the Fed has given every indication that it will maintain its rate policy unless the negative economic impact becomes evident, a surge in growth could excite speculation on an additional hike in 2019.

Economics

The US economy is verging on its best-sustained showing in four years and if a more than 3% expansion is maintained into the fourth quarter it will be the strongest since the financial crisis and recession of a decade ago.

Consumption is the chief component of American economic activity comprising over 70% of GDP. While business investment and manufacturing are leading indicators for economic growth given their necessary lead time, it is the consumer who calls the tune. Annual core personal consumption rose 2.1% in the second quarter, a bit slower than the first quarter’s 2.3% which had been the best in six years.

Hurricane Florence which caused extensive flooding the the Carolinas in September may have curtailed some economic activity in the third quarter which would likely be recovered with subsequent rebuilding.