By Carlos Guillen
Quite encouraging today is that stocks are making a substantial move to the upside as reflected by the Dow Jones Industrial Average, which has reached an all-time intraday high as investors have been compelled by the most recent bit of economic data that showed a much better than expected improvement in U.S. output.
That is right, the economic data presented today was ... well ... phenomenal, and investors reacted accordingly. As it stands, the Bureau of Economic Analysis said that real gross domestic product (GDP) during the third quarter of 2013 increased quarter-over-quarter by 4.1 percent (annualized), much better than the Street's consensus estimate calling for a 3.6 percent quarter-over-quarter rise, increasing at a faster rate than the 2.5 percent achieved in the second quarter of this year and representing a sharp improvement over the prior estimate of 3.6 percent posted about a month ago. Additionally, this result represented the highest percentage increase in GDP since the fourth quarter of 2011 when GDP increased by 4.9 percent, marking ten consecutive quarters of economic growth. It was quite encouraging that the four main categories of GDP contributed to overall growth; those being consumption, investments, government, and net-exports. In fact, the last time these four components of GDP contributed to growth in the same quarter was back in the second quarter of 2007. The better than expected GDP growth was caused by consumption (more precisely Personal Consumption Expenditures), which contributed more than it did in the prior estimate. In fact, consumption contributed 1.36 percentage points in this final reading, which increased from the 0.96 percentage points contribution previously estimated, and increased from the 1.24 percentage point contribution in the second quarter.
On the inflation side, prices for GDP increased by 2.0 percent (annualized), matching economists' average forecast and unchanged from the prior estimate.
As we saw this past Wednesday, the Fed finally tapered and gave indications that the U.S. economy continued to slowly improve. Moreover, Federal Reserve officials said they expect GDP to grow between 2.8 and 3.2 percent in 2014, and to pick up further in 2015. They forecast growth would be close to 2 percent for this full year. And with this final third quarter GDP result, we can certainly see that the economy has gained speed, reflecting the fact that more Americans got jobs and households adjusted to tax increases from earlier in the year. It is apparent that the Fed's monetary policy has been working, but what we really need to see is that the economy can hold its own without any assistance, and the Fed has already begun to reduce it bond purchases, meaning less help to boost economic growth. Let us just see what happens to GDP growth as this year comes to an end.