Why Q3 GDP Revision Soothed the Markets

Jon C. Ogg

The U.S. Department of Commerce has issued its first revision to third-quarter gross domestic product on Wednesday morning — with no real revision. The preliminary gain for GDP was maintained flat at 3.5% growth. This met the Dow Jones consensus estimate.

Also worth noting was that the Commerce Department’s price index was left unchanged at 1.7%. Remember that the Federal Reserve effectively has maintained a 2.0% inflation target, with a higher-end of the range at 2.5%.

There was one area that came down, and that is on the prized consumer spending segment of the GDP report. This reading was adjusted down to 3.6% growth in the third quarter after the preliminary estimate pointed toward 3.7% growth. Note that consumer spending accounts for close to 70% of U.S. GDP.

While third-quarter GDP is lower than the 4.2% reading for the second quarter of 2018, the Commerce Department signaled some of the driving forces:

The increase in real GDP in the third quarter reflected positive contributions from PCE, private inventory investment, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by negative contributions from exports and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the third quarter primarily reflected a downturn in exports and decelerations in nonresidential fixed investment and in PCE. Imports increased in the third quarter after decreasing in the second. These movements were partly offset by an upturn in private inventory investment.

Sometimes it is important to consider where things are in raw dollar terms. The Commerce Department showed that the third quarter’s current-dollar GDP increased by 5.0%, or by $248.4 billion, to $20.66 trillion. For a comparison, the second quarter’s current-dollar GDP had risen by 7.6%, or $370.9 billion.

Another issue that had an impact on stocks and bonds on Wednesday is that the markets are awaiting a speech from Federal Reserve Chair Jerome Powell at noon Eastern Time. His speech is called “The Federal Reserve’s Framework for Monitoring Financial Stability” and is being delivered at the Economic Club of New York. One issue that the markets need to ask is if they really think that Powell will further dial down his hawkish tone just because of equity market selling and softer economic readings over the past six weeks.

After 30 minutes of trading, the markets were seen as follows (rounded):

  • Dow Jones industrials up 143 points at 24,891
  • S&P 500 up 10 points at 2,692
  • Nasdaq up 43 points at 7.125
  • Crude oil down 58 cents at $50.98
  • 10-year Treasury note up two basis points at 3.07%