Jason Stipp: I'm Jason Stipp for Morningstar. The government's first pass at the third-quarter GDP came in at a respectable 2%, but some recent indicators show that their [first] revision to GDP for the third quarter could have some upside.
Here with me to talk about what some of those indicators are, and why they are important on the face of themselves is Morningstar's Bob Johnson. He's director of economic analysis.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: So the 2% was actually better for the first third-quarter GDP number than a lot of people had hoped, but you've seen some recent things that show when they take another look at that number, which they will do, there might be a little bit of upside there. What are some of the things that you've been seeing on the positive side of that ledger?
Johnson: There's been a number of positive developments, and most of them came out this week frankly. The number one was the export number that came out, the balance of trade number that came out. The government had estimated in their GDP report that for the last month of the quarter, which they have to use an estimate for, that we'd see a degradation in the trade balance, it'll get worse. Actually the trade balance for September, now that we've seen it, got better, and so that will add as much as four or five-tenths of a percent to the GDP estimate that they had out there before--something in the 2.4% to 2.5% range just based on that number.
Stipp: So looking at the imports versus the exports: The import number had improvement that was maybe better than was expected in the most recent report right?Read Full Transcript
Johnson: Yes, if we want to break down on the import-export report, it was a good report. We went from [a trade deficit] of just over $46 billion down to $44 billion on a monthly basis. So we had a nice decline in that number, and as you'll recall that number has been highly volatile lately and has been as high as $50 billion. So to be back at $44 billion is a good thing. So I'm pleased with that number, and it was primarily because of improvement in the import side of the house more than the export side of the house.
Stipp: Recently with the Fed's actions to stimulate the economy, that could weaken the dollar potentially over the longer term. Might that have a positive effect on exports going forward?
Johnson: Absolutely. I think the QE2, the easing policy to bring down rates, also tends to bring down the dollar because one of the things that determines exchange rate is the relative interest rate. If you can get 4% in one country but only get 0.5% in another, you may move your money around just on that basis. So quantitative easing is an explicit attempt to lower long-term interest rates, and as they do that, it does tend to bring down the value of the dollar, and it's down as much as 10% since late August and since those things tend to operate with a lag, I would expect the export number to get even better in the months ahead as the U.S. economy becomes even more competitive, especially when we saw the great productivity numbers last week.
Stipp: There was also some headlines this week, though, about some international backlash to the Fed's policies. Is there concern about maybe some trade intervention or something like that if the international community thinks we're trying to devalue the dollar, to make our exports more attractive?
Johnson: You could never guess what exactly what the market's building into their assumptions. Certainly at the beginning of week, we had both Germany and China publicly criticizing our policy and saying that it was wrong, and it was misplaced, and that certainly I think has had a negative effect on the market the last few days.
So that's certainly been weighing on things, and what they are afraid of is that the dollar comes down and does make us more competitive, that we're engaging in the type of trade war, and that there is some fear that maybe they retaliate when you get into 1930 situation where we all start devaluing our currencies in an attempt to kind of beat the other guy.
Stipp: So it is certainly something to keep an eye on that front. Another thing that you saw this week was on the inventory front; it's kind of an interesting story there. What did you see on inventories and what's the effect potentially for GDP there?
Johnson: We got the wholesale inventory numbers, and they showed an increase or a build in inventories, and much more substantial again than it was in the government estimate. So it should be another positive adder to the GDP number. The numbers are a little bit hard to put my hands on, but it is an improvement.
Now there is good news and bad news about all inventory numbers, but it was a build and obviously some people say well that means things are stacking up and things aren't moving...
Stipp: That would be a negative thing that people aren't buying and so the warehouses are getting filled up with products.
Johnson: But frankly, I think most of the interpretation that I've seen and kind of looked at is, when you have a build in wholesale versus at the retail level. When we've got a retail level buildup, you've got to deal with it. You got to cut prices, you got to move the stuff, and it indicates weak end-user demand.
When things build up in wholesale, sometimes it's a better indication that businesses have more confidence, and if they are saying, well, maybe I'm thinking prices may move up a little bit or I need to stock ahead of Christmas so I don't run out. So people are viewing the build in wholesale inventory as a relatively positive thing, and that was a decent number this week a decent move up.
Stipp: The last thing that you'd mentioned that could have an effect on GDP, and possibly on the negative side, is the construction data that you saw recently. What did you see on that front and what the effect of that might be?
Johnson: Construction data overall, we can see what the government estimated in their GDP report and what actually came in was a little bit less, not very much, but enough to take maybe a couple of tenths off the GDP.
So if I said, everything I had positive might have added to 2.5% or 2.6%, well maybe its 2.2% or 2.3% growth because of the construction number, and the construction was mainly a bigger slowdown than expected in commercial construction, somewhat offset by better residential and by quite a bit better public construction: highways and government structures.
Stipp: Bob, thanks for the insights on GDP and the factors that maybe affecting that next revision that's coming out. I appreciate your time.
Johnson: Great to be here.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching