Economic First Look: Parsing the GDP Data

 | Oct 22, 2011 | 8:45 AM EDT
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Stock quotes in this article:







  • Chicago Fed National Activity Index, 8:30 a.m. (all times EDT)
  • Richard Fisher, President of the Dallas Fed (voter), speaks, 9 a.m.


  • S&P Case-Shiller Home Price Index, 9 a.m.
  • Consumer Confidence, 10 a.m.
  • FHFA House Price Index, 10 a.m.
  • State Street Investor Confidence Index, 10 a.m.


  • Durable Goods Orders, 8:30 a.m.
  • New Home Sales, 10 a.m.
  • EIA Petroleum Status Report, 10:30 a.m.


  • GDP, 8:30 a.m.
  • Jobless Claims, 8:30 a.m.
  • Pending Home Sales Index, 10 a.m.


  • Personal Income and Outlays, 8:30 a.m.
  • Employment Cost Index, 8:30 a.m.
  • Consumer Sentiment, 9:55 a.m.

This week is action-packed, with economic data that has the potential to move markets. Of most interest to investors is probably the third-quarter GDP report Thursday morning. Since it covers economic activity going back to July, it doesn't help us to understand where we are now given the volatility since then, but it's still very important.

I would be remiss not to point out there are a number of housing data reports due this week, as well as Durable Goods and Personal Income and Outlays, two of my favorites as they have many telling details that few people check. Also, the Chicago Fed National Activity Index is an obscure, less followed report that is not easy to interpret. It's a comprehensive read of a composite of 85 different indicators and it acts as a broad measure of national economic health, so it's a real-time GDP proxy that covers September. It, too, is a favorite of mine but it hardly gets any press, so I'll cover it in a Columnist Conversation post Monday.

Now on to GDP. I usually stick to economic data, but because it's earnings season, one company in particular is a bellwether for global economic activity:  General Electric (GE). In the international conglomerate's industrial segment, organic revenue growth (excluding new or disposed-of businesses and absent the effects of currency fluctuations) grew by 8% in the third quarter. But much of this growth came from emerging markets, which saw double-digit growth rates compared with the U.S., where GE downgraded its 2012 growth forecasts. CEO Jeff Immelt described the global economy as a "volatile macro environment."

Let's also consider a few other forecasts for third-quarter GDP. According to Bloomberg, Goldman Sachs (GS) and Macroeconomic Advisers recently upped their forecast for third-quarter GDP growth to 2.5% from 2%. Jan Hatzius, chief U.S. economist at Goldman, pegs the odds of a new recession in the next few months at 40%, implying that any factors driving third-quarter GDP growth might not continue, or are highly uncertain. The Conference Board's estimate is much lower, 1.4% for third-quarter GDP growth, and it has a recession probability of 50%. Other economists are in between; a Bloomberg survey of economists from last month gave a median forecast of 1.8% third-quarter GDP growth.

Whatever the case, caution is warranted when extrapolating third-quarter GDP results. I've discussed many economic indicators in depth, noting that many reports are at odds with each other -- sometimes details in the same reports disagree! I've written about some of these data points recently. For example, The Empire State manufacturing survey was "bad," but the Philly Fed survey was "good." We also heard that retail sales posted a strong gain, and that consumer confidence was at its lowest level in decades, as I discussed in this column. Similarly, the latest payroll report was ambiguous, as I discussed here and here. The bottom line: The most recent data is, as Immelt put it, volatile.

A big reason why third-quarter GDP results are expected to be stronger than in previous quarters is that consumer spending has held up well, as evidenced by September's retail sales report. Consumer sentiment is extremely weak, however, and I question whether it will continue at the same pace. September's results may have been more of a one-time thing than a trend.

Capital spending, per the Industrial Production report, has been strong. Note, however, that capital can be a substitute for labor, so increased capital spending might not necessarily be indicative of future economic growth. Instead, it might reflect companies' desire for increased productivity through more technology and automation to reduce reliance on labor. So it may portend less, not more, hiring if my thesis is correct.

On the other hand, outlooks vary by industry. Those with a global focus are more optimistic than those with a domestic focus. So, capital spending could be a positive sign, but it's ambiguous -- we can't use the default assumption that more capital spending means more growth. It could just be a preference shift to capital from labor.

When we get the GDP report, remember that it includes economic activity from as far back as July, as well as August and September. We didn't really see the plunge in consumer and business confidence until later in the quarter, spurred by the debt and deficit debacle in Washington.

Going forward, economic growth may be softer if the GDP report proves to be a pleasant surprise.

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