How the “wealth effect” fueled Q3 GDP

 

 - by New Deal democrat

In Q3, personal spending rose 1.6%, or 6.4% annualized, while personal incomes only rose 0.8%, or 3.3% annualized. A little more precisely, personal spending rose 0.75% more than personal incomes.

Just how much more did spending rise than the income to fuel it compared on a historical basis?

In the past 80 years (or 280 quarters), spending only exceeded income by 0.75% or more only 29 times. In other words, in only 10% or all quarters has spending exceeded income so much:

 https://fred.stlouisfed.org/graph/?g=1Pavh 

Needless to say, this is not sustainable. This is particularly so when real disposable personal income did not grow at all last quarter, and real personal income excluding government transfer payments has not increased at all in the past two quarters:

 https://fred.stlouisfed.org/graph/?g=1Pays 

As I have written a number of times in the past few months, this is probably spending driven by the “wealth effect” which in turn is driven by stock market gains. 

Unless you think we are headed for AI-driven nirvana, this is not going to last.

The low pace of firings continues to Christmas

 

 - by New Deal democrat

Our last bit of news before Christmas continued the positive news, as initial jobless claims declined back to 214,000, while the four week average also declined to 216,750. The last three weeks collectively have had the lowest seasonally adjusted numbers since January. Meanwhile, continuing claims rose back above 1.9 million to 1.923 million.

As is usual, for forecasting purposes the YoY% changes are more important. Here, initial claims were -2.3% lower than one year ago, the four week average down -4.2%, and continuing claims higher by 2.2%:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1P7pl&height=490 

Although per the recent QCEW update through Q2 as well as the recent nonfarm payrolls reports show that on net almost no hiring is happening, jobless claims tell us there is very little firing as well. This is a positive report.

Strong Q3 GDP, but long leading components are mixed; first preliminary positive signs for production in October

 

 - by New Deal democrat

Because today is a travel day for me, I am going to keep my comments about the much-delayed Q3 GDP report brief.

As was obvious, a 4.3% annualized real GDP print is very good, as was the real final sales to domestic purchasers number. One of the comments I made repeatedly at the time, as the summer regional Fed reports came in, as well as the weekly consumer retail spending numbers, was that they were surprisingly good - probably reflecting a rebound from the weak spring numbers immediately after “Lbieration Day” tariffs. Basically I think the excellent GDP numbers reflect that.

As usual, my focus is on the more forward looking components of the GDP release: real private residential fixed investment (housing) and corporate profits.

The story in housing continued to be negative, as real private residential fixed investment declined -1.3% in the Quarter:

  https://fred.stlouisfed.org/graph/fredgraph.png?g=1P5Bk&height=490 

 

This means housing is down -15.3% from its 2021 peak, and -3.5% from its secondary peak in early 2024. And keep in mind that the best forecasting model is to deflate this metric by real GDP - and since there was strong improvement in real GDP in Q3, the relative decline is even worse.

The story on the second long leading indicator, corporate profits, was completely different, as they grew by a strong 4.2% after accounting for inventories to another new all-time record:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1P5Bo&height=490 

The bottom line: if the rear view mirror, coincident reading of Q3 GDP was very positive, the measures which forecast where the economy is headed in 2026 were mixed.

Keep in mind, though, this is a report covering July through September, i.e., 3 to 5 months ago. In other words, more stale data. We still have very little data from the period of the government shutdown months of October and November. On that score, manufacturers new durable goods orders for October were reported this morning. The headline number increased 0.5%, but the core capital goods number declined -2.2%:

 https://fred.stlouisfed.org/graph/?g=1P5Ae 

The YoY trend for both remains in strong expansion, up 4.8% and 6.2% respectively:

  https://fred.stlouisfed.org/graph/?g=1P5Aw 

I have been very concerned that the government shutdown may have tipped the economy into recession. The jobs numbers have certainly been recessionary. But the weekly consumer spending data has, contrarily, been very healthy. This morning’s two reports make it all but certain that there was no recession in Q3, and are the first -preliminary - positive indications that at least in the first month of the shutdown, the economy continued to make progress.

Two important employment indicators from November: one says continued expansion, the second recession

 

  - by New Deal democrat

This is going to be a sparse week for data, with the exception of tomorrow’s long-delayed Q3 GDP report, and jobless claims on Wednesday. Sadly, so much of the data is still missing or stale that the best source for up-to-date information is in the regional Fed reports, most of which will be updated by this Friday (so stay tuned for that). And don’t be surprised if I play hooky for a day or two.

That being said, one important - and positive - data point can be updated based on last week’s November jobs and CPI reports: real aggregate nonsupervisory payrolls. To recapitulate, these always peak before a recession begins, usually within 3 to 6 months. And there is a very good fundamental reason for that: once the average American household has less cash to spend in real terms, consumption promptly gets tightened, and that downturn in consumption typically brings about all the other indicia of recession quickly.

But the news from November was good. For the two months covered by the updated jobs report, nominally aggregate payrolls increased 0.9%. Meanwhile, the official cpi index only increased 0.2% for the two months from September through November, meaning that real nonsupervisory payrolls increased 0.7%. In the graph linked to below, November’s level is set to 100, which is the only visibleway to show  the increase since September:

 https://fred.stlouisfed.org/graph/?g=1P3Jp 

Note that even if the much-criticized shelter increase of 0.1% were instead changed to 0.3% each month, the average over the previously reported months this year, real aggregate payrolls would still have increased 0.2% for the two month period, still a new high.

Nevertheless I recommend taking this will a heavy dose of salt.

On the negative side, it is difficult to imagine such a weak labor market not being on the cusp of, if not already in, a recession. As of November, service providing jobs were only up 0.7% YoY, while goods producing jobs were down -0.15% YoY. A shown in the graph linked to below, which normalizes both readings to zero, only once in the past 85 years - in 1944 - has employment in both sectors been this low YoY without either being already in, or at least on the doorstep of, a recession:

 https://fred.stlouisfed.org/graph/?g=1P3KS 

Keep in mind, by the way, that this data is not yet adjusted for any of the QCEW reports this year, which have suggested at by the end of June, employment was only up 0.3% compared with 12 months before, as opposed to the 1.0% higher indicated by the current nonfarm payrolls surveys.

We are still in many ways flying blind. In particular, we really need to see reliable real sales, production, and consumption data through the period of the government shutdown to determine whether or not that self-inflicted wound pushed the economy into contraction or not. Without it, any conclusion I might reach would just be speculation.

Weekly Indicators for December 15 - 19 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

All of the trends that we have been seeing for the past several months appear to be becoming more entrenched. That includes the re-normalization of the yield curve on the positive side, and weak withholding tax payments and transportation metrics on the negative side. One trend that doesn’t seem to be affected: consumer spending, which is still chugging along as it has for the past several years.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a penny or two towards my lunch money.