'Glimmers of Hope' in Economic Data

Jeremy Glaser: Good morning. I'm Jeremy Glaser. I'm here today with Bob Johnson, he's our director of economic analysis. We're going to get a preview of Friday's GDP report, and also look at some data that maybe shows that the fourth quarter is not off to such a terrible start. 

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So let's start with third-quarter GDP. A big range of estimates here about what December could look like. What are your expectations for how much the U.S. economy grew?

Johnson: I'm going to guess the number comes in around 2.4%, 2.5% sequential growth annualized. But that will amount to something lower, about 1.5% if you take the third quarter of this year and compare it to the third quarter of last year. And I think when we wrap it all together for all of 2016, we'll probably end up at about 1.5%, 1.6% GDP growth, which is quite a bit lower than the 2%-2.5% where we've been trending.

Glaser: So what's driving that number lower?

Johnson: As we look at the data, there hasn't been a lot of fixed investment, government hasn't been as big a help as we hoped, and at the beginning of the year, the exports. So clearly there's been a few things that have weighed on the numbers, and certainly the mechanics in the data, when we started out with such a weak first half, that you'd have to have really outstanding numbers in the last two quarters to bring the numbers back up again. And we'll have a little help, and a lot of the press will be talking about this 2.4%, 2.5%--whatever it ends up being--growth rate in the third quarter--and boy, that's a dramatic acceleration, the economy's picking up again. But we caution--it's a lot of how the seasonal numbers--especially the autos--flow through the data, and a lot of how the bad weather hits, and that's what drives the ups and downs in these numbers. We view this as more of the same. If you probably average it out, it's something in the 1.5%-2% growth rate is where we're at, which is still lower than I think we have been.

Glaser: What do you expect from the consumer? That's obviously a big part of that number.

Johnson: Yeah. It sure is. And that's been a key driver of GDP, and it's been at a 3%-4% growth rate, and at 70% of GDP, that amounts to a pretty big contribution. In fact it's just about all of GDP growth that we've seen in a few quarters, and then some. Some have actually been negative, some of the components. As I look at this quarter, I'm thinking the consumption number is looking around 2.6%, which is down from that 3%-4% where it has been. But inventory won't hurt as much this time around. Maybe it will even help. So there's a few other things will aid the number along despite the fact the consumer is going to be just a little bit lower in the third quarter from what I view as a very high and unsustainable number in the second quarter.

Glaser: You mentioned inventories there. That and trade can sometimes be wild cards when coming up with these GDP calculations.

Johnson: Yes.

Glaser: Do you expect that to be a major factor?

Johnson: I think that I had been worried we could just see a surprise in one of those, and we always get that data at the last minute. We actually saw some of the data. The government's now started doing pre-releases of some of that data before the GDP, so everybody can help formulate their GDP numbers a little bit more closely. And we saw an inventory number today that looked like both retail and wholesale inventories were up a little bit for that last month of September, at least on this very, very preliminary estimate. So that means inventories may actually turn out to be a little bit of a help to the GDP calculations instead of a hurt. So I think the surprise there is more likely to be on the upside than the downside, so that's great news.

And trade was also out again on this very preliminary basis--without an inflation adjustment, which really makes it hard to interpret but nevertheless--the trade deficit did decline, which means that net exports should be a positive for the economy. And the September trade numbers were really fascinating to me, yet again. It was one of those situations where exports out of the U.S. were up, and imports from the rest of the world were down. With a strong dollar, we're supposed to be getting about the reverse of that. And it really is very unusual. And it's a lot of what we've talked about in consumption, with consumers wanting experiences and less goods. Consumer goods, imports, year over year, September to September, were down 8%, which just is unheard of in a relatively strong U.S. economy with a weak dollar. Capital goods--we all knew would be weak because there was a lot of shale oil equipment that came in and certain price things--those were only down 2% in terms of imports, so the real problem was really on the consumer side, which is highly unusual.

Glaser: Let's look into the fourth quarter then. You have been concerned about the strength of the economy. We've talked about that a number of times. But you said some data this week seems like maybe things aren't as bad as maybe you had feared.

Johnson: Absolutely. And we've had a relatively negative opinion, and we're waiting to be proved wrong. But there were some glimmers of hope this week. Starting on Monday, we got the world PMI data out of the Markit, and Europe and the U.S. both had one of the biggest increases in the manufacturing PMI that we've seen in some time, with new orders components being particularly strong, which means maybe the manufacturing recovery here will have a little bit of a staying power to it, which would be very, very good news. So that was on Monday, and that was good news.

And then we got the new home sales data, which to some--the headlines are all like "disappoints analysts" and "down from highs a few months ago." We point out the new home sales data, 593,000 annualized units, is the second highest of this recovery. And we've had this gradual creep up in new home sales, so we're now back to 12% year-over-year growth. We had spent most of this year under 10%, and now we've, with this month's data, crept back up over 12%. So again, because of the limitations on land and affordability, we don't think that this is going to accelerate to 20% or 30%, and be a big adder to GDP, but we're just greatly relieved that it's not falling apart, that we actually had a decent month of new home sales.

Glaser: So, after some of this positive data, it doesn't change your overall thinking about where the economy's going in the next couple of quarters; you still think we have a lot of slow growth ahead of us.

Johnson: I do. I think we've got tremendous headwinds in front of us from demographics. And I'm thinking that as we look ahead--and again, without thinking I was just telling everybody my GDP forecast was between 2% to 2.5% over the last five or six years, and I haven't really had to budge from that. And now some of the demographic issues, and getting nearer that potential end of the recovery, in my opinion, and auto sales peaking, I was looking more at a 1.5% to 2% as kind of my starting point for looking for the next year or two ahead, which is where I think we'll just about end up. With the wild card in all that being, in a new presidency do we see a big infrastructure spend? And there's been a lot of talk about that lately, and if there's a hope for the economy, everybody seems to be pinning it on a big infrastructure spend in 2017.

Glaser: Bob, thanks for your preview and the analysis today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.