The Big US GDP Beat: Hype Versus Reality

U.S. Q3 GDP Of 2.8%, Beats Expected 2%: Good, Bad, or Meaningless?

Of course, here on QE planet, the final answer depends on whether markets believe the figure indicates real growth, and if so, does that mean QE is likely to end sooner, send rates higher, and send risk asset prices lower?

The following is a partial summary of conclusions from our weekly  analysts’ meeting in which we share thoughts and conclusions about the key  lessons we learned from last week’s action in global asset markets that matter for the coming week and beyond. These lessons apply to virtually all liquid global asset markets, particularly currencies, equities, commodities and bond markets.

Here’s What We Learned

Consensus was for 2%. We got 2.8% (despite personal consumption growth at 1.5% instead of the expected 1.6%) due to higher than expected inventories, which added 0.8% to GDP, accounting for the difference between the expected 2% and reported 2.8%. However it’s unclear whether the rising inventories suggest growing or slack consumer demand.


Some economists believe that extra 0.8% came from inventory increases that resulted from weaker sales causing old inventory to accumulate, rather than new purchases of stock in anticipation of better sales. Supporting this theory, retailers have been reporting softer back to school and Halloween sales. If so, growing inventories in Q3 mean lower production that reduces GDP in Q4.

Others disagree and believe the inventory build reflected actual growing demand. For example, per Deutsche Bank’s Joe LaVorgna. “… the continued health of the various production surveys, such as the ISM and regional PMIs, suggests that the factory sector is not pausing to rebalance. The reason for this is likely due to the fact that order backlogs continue to expand and currently stand at post-recession highs. Inventory levels remain extremely lean: While the economy has been in expansion mode since mid-2009, inventories only rose above their pre-recession peak last quarter.” (via here)

Yet, back to school and Halloween sales were weak, and forecasts for the critical holiday season have not been rosy. For example, Morgan Stanley recently issued a report predicting the weakest holiday sales since 2008.


So Did The GDP Beat Mean QE Ends Sooner?


Again, it depends how you interpret the details. As shown above, there are positive and negative interpretations of the big inventory spike. Seeking to resolve that, we looked at other components of the GDP report. For example:


–Per Bank of America Merrill Lynch’s Joshua Dennerlein: “Real final sales, which are a good measure of underlying demand because it backs out the inventory contribution, came in at 2.0%… In other words, the economy remains stuck in the mud. We believe that the Fed needs to see an acceleration in growth before they will begin tapering.” (via here)


Lesson: USD Spike After GDP Beat Suggested Fear of Good Jobs Report Too


As we noted last week here, and in our introduction to inter-market analysis and the need to monitor certain currencieshere , you can learn a lot about other markets by watching currency markets.


At the close of US stock markets, the USD had gained against all of the major currencies except for the JPY, the only one that ranks higher as a safe-haven currency (see here for explanation).


That strongly suggests the USD was moving up on risk aversion (fear) rather than the implication of stronger growth from the seemingly strong Q3 US GDP report. In other words, if markets felt better US growth were coming, that would feed risk appetite and we would see higher ranking risk currencies like the AUD and NZD gaining on the USD (forget the EUR, it was expected to drop due to the ECB rate cut undermining its value regardless of whatever else happened that day).


What Were Markets Afraid Of?


–that stronger US GDP meant QE might end sooner

–that Friday’s monthly jobs reports might also beat expectations and further raise the odds of the dreaded QE taper starting sooner than currently expected.

The key lesson here: Good news is defined as that which is bad enough to suggest that QE continues, bad news is the opposite.

The rally after the good US jobs report does not contradict this idea, as we discuss here in section 4 on the reliability of the US jobs report.