24/7 Wall St.

It was no secret that the economic activity was looking stronger in 2017, but now the talk of getting back to 3.0% growth in gross domestic product (GDP) is more of a reality than a theory. The U.S. Department of Commerce’s Bureau of Economic Analysis issued its first revision for third-quarter GDP for 2017, raising its level to 3.3% from a prior target of 3.0%. What should stand out in this report is that this marked the strongest quarterly output gain in three years.

The strong GDP report was actually right at the level of expectations. Both Bloomberg and Dow Jones were calling for a 3.3% revision for the third quarter. Real GDP rose by 3.1% in the second quarter of 2017 as well.

Wednesday’s report indicates that some of the growth trends are stronger and in some of the same areas of the economy as we have seen. The general picture of economic growth remains the same, but higher revisions were seen in the areas of nonresidential fixed investment, state and local government spending, and private inventory investment.

There was a negative contribution from residential fixed investment during the third quarter, some of which may have been storm related. Imports act as a subtraction against GDP growth, and it was shown that imports decreased.

Real gross domestic income (GDI) increased by 2.5% during the third quarter, up from a revised level of 2.3% in the second quarter.

The Commerce Department also indicated that current-dollar GDP increased by 5.5% in the third quarter, a gain of $259.0 billion to a level of $19.509 trillion. In the second quarter, current-dollar GDP increased by 4.1%, or $192.3 billion.

It is well known that the Federal Reserve has been targeting 2.0% to 2.5% inflation, and this actually may be more fuel to justify additional rate hikes ahead. The price index for gross domestic purchases rose by 1.8% in the third quarter, roughly twice the 0.9% gain that was recorded in the second quarter of 2017. The PCE price index increased by 1.5% (versus 0.3% previously) and the core PCE price index, which excludes food and energy, rose by 1.4% (0.9% previously).

Corporate profits, with inventory valuation adjustment and capital consumption adjustments, increased by $91.6 billion in the third quarter from a gain of just $14.4 billion in the second quarter. This was broken down with a strong contribution from financial firms as follows:

• Profits of domestic financial corporations increased $60.6 billion in the third quarter from a decrease of $33.8 billion in the second quarter.
• Profits of domestic nonfinancial corporations increased by $12.5 billion in the third quarter, compared with an increase of $59.1 billion in the second quarter.
• The so-called rest-of-the-world profits increased by $18.6 billion in the third quarter, versus a decrease of $10.8 billion in the second quarter.
• Receipts increased by $23.1 billion and payments increased $4.6 billion during the third quarter.

With the markets at all-time highs and with the big revision higher meeting estimates, this should be viewed as an expected event — that is still positive for stocks and potentially just that much more fodder for the Federal Reserve to justify a rate hike in December.