Q4 Growth Likely to Be Stronger than Q3

Thursday we got another indication that the U.S. economy is returning to strong growth. The government's first estimate for the third quarter came in at a 3.5 percent annual pace.

Again most economists were wrong. The consensus was for only a 3.2% jump. In fact several analysts had actually lowered their estimates yesterday in advance of the report.

The quarter was the first to experience the positive effects of emergency government stimulus programs put in place earlier in the year.

Growth in consumer spending and confidence, which accounts for about 70 percent of the economy, contributed significantly to the rebound.

Purchases of durable goods, which include autos, jumped 22 percent, the biggest increase since 2001. The governments $3B Clunkermania program obviously contributed significantly to that huge durable goods jump. But what was perhaps more encouraging was the data that showed that even excluding sales, production and inventories of automobiles, the economy grew 1.9 percent in the quarter. The stimulus programs are acting as a catalyst and not just the only source of growth.

Many economists now agree that the recession ended earlier in the year. As we have said for quite sometime, when the National Bureau of Economic Research officially marks the recession's end, they will likely point to June 2009. And that prediction was made by professor Mark Hirschey back in November of 2008.

In the 3rd quarter, residential construction also jumped at a 23 percent annual rate. It was the first quarterly gain in almost four years and the largest jump since 1986.

The home-building market -- which as be ailing for several years -- surged as sales climbed, propelled in part by an $8,000 tax credit for first-time buyers. The credit (also part of the emergency stimulus past by the US government earlier this year) will likely be extended with the support of the majority of the Senate.

And Q3 earnings continue to be strong -- pointing to not only moderate growth in Q3 -- but extremely strong growth in Q4 and into 2010.

Amazon (AMZN) in particular has used the past year of recession to continue to decimate it's brick and mortar competition. Amazon, which is reorganizing the retail market value chain continues to produce strong results. “You should see more expansion in the categories we’re in, as well as more geographical expansion over time,” said Amazon's Chief Financial Officer Thomas Szkutak last Thursday.

In the overall manufacturing sector, total inventories in Q3 continue to drop precipitously. The only conclusion: factory production will need to keep pace with significant upward momentum.

As stockpiles decrease and demand continues to grow more factories will need to come back online quickly. The gains required to produce such output will now lead to a quick rebound in hiring.

In September, the unemployment rate likely reached it's peak and with growth now ramping significantly in the 4th quarter, overall job growth is just around the corner.

You'll remember that we warned back in August to not be surprised by robust Q3 growth. Don't be caught off guard again with Q4 growth that will prove to be even stronger.

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Comments

[igggy:]

Hm, they've been revising past GDP estimates down lately so the 3.5% growth might turn out to be less than 3.2% after it's revised.
Also, if AMZN increases its earnings at the cost of its rivals, that's not going to improve overall earnings at all.

Oct 30 10:42 AM

[William M. ...:]

Thanks for the article. The magnitude of the GDP downside and upside swing was huge. Could you expand on why you feel Q4 GDP may be better than Q3 with CashClunker (about 1% of the GDP growth) program gone?

Yes, the only thing more amazing than the Amazon growth story is the 70 P/E ratio this retail stock commands. Business is going gang busters for Amazon but after that last $25 stock pop I'd bet you'll make more money going short than long Amazon at this point.

Oct 31 10:27 AM

[The Good Ne...:]

William,

Thanks for the comment.

One of the stalwart measures for me is the ISM manufacturing index... I've continued to point to that Index as a superb indicator of what is really occurring in the overall US economy grow-wise - not just manufacturing. In addition to reporting the manufacturing sector conditions, the ISM's PMI index has a very impressive track record in GDP growth correlation. A PMI in excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy. Back on September 2 when their September report was released, I was able to headline that growth was likely already at 3.7% annually... very much in line with the government estimate published this Thursday for Q3. Looking at the latest ISM index the PMI for September (52.6 percent) it corresponds to a 3.6 percent increase in real GDP annually. November's report (for October) will give us a concrete early indication of what is in store for Q4. If the latest NY Empire index is any guide, the PMI will be up sharply in Oct.

Additionally US businesses and industries are nowhere close to burning through the 700B of stimulus dollar put in place. They are just now figuring out how to apply it to their particular processes and procedures. With clunkermania representing only a small $3B of that -- we have a long way to go before all industries including autos make their way through that.

In addition to Amazon -- Intel, Alcoa, JPM, and many others painted very strong business condition pictures in their investor calls. No doubt the homebuyer credit will also be extended well into 2010... And if history is any guide, the strongest economic rebounds have usually been preceded by the deepest lows...

I'll write about more evidence next week...

And thanks for your article today as well!

GNE

Oct 31 01:09 PM

[emo:]

""In September, the unemployment rate likely reached it's peak and with growth now ramping significantly in the 4th quarter, overall job growth is just around the corner.""

This guy will prove to be a complete fool. Unemployment claims are still well above 500,000 per week. Additionally, as people come back into the labor market, this will push up unemployment even if there is modest job creation. He also doesnt understand that Obama's policies are causing a hold back in hiring combined with the fact that small business is still under a credit crunch. Even Obama fan Mark Zandi says unemployment will go to 10.5%

The ISM is not a great indicator for predicting GDP growth. The correlation has infact broken down in recent years. During 2004-2005 the ISM set a consecutive months record for above 60, yet GDP growth was in the 3% range, not the 4-5% the ISM would have predicted.

Fact is the US economy is fundamentally in worse shape than at the beginning of any other expansion. A weak dollar and rising commodity prices dont bode well for a 1980s or 1990s long expansion of 8-10 years. More like 3-5 at most. Consumption at 70% of GDP is still well above the long term trend of 65%. The savings rate fell to 3% from 7% in May. With real income growth negative, this doesnt not bode well for future GDP growth.

Now it is possible there could be a V shaped recovery. That would be a disaster. It would indicate that the variables that caused the recession in the first place, arent being fixed. That instead the Fed has printed up money and consumers are going further into debt, not deleveraging which is required for a long term economic expansion.

You maybe the: Good News Economist, Ill be the Realist Economist

Oct 31 05:01 PM

[emo:]

Too bad you dont know enough to know what a V really means this time. This isnt 1983 or 1959.

You need to read some Austrian Economics about credit expansion.

The recession wasnt the problem. The expansion from 2002-07 was the problem. We only get a V with printed money, expansion of credit and more debt. It would be accompanied by a weak dollar, rising commodities and falling real wages (strong GDP and falling real wages can go together as they did in 1977-79 and 2004-07). The expansion would be short and the subsequent recession worse than the past recession. So keep whistling thru the graveyard.

Oct 31 05:13 PM