Friday, October 26, 2012

Q3 GDP Surprised on the Upside, but ...

Q3 annualized real GDP growth came in at 2.02%, above the 1.9% consensus, and certainly above our 1.5% estimate.
At first, we thought that the upcoming Presidential election may have 'impacted' the number.  Then we asked ourselves to stop throwing those conspiracy theories around.  Finally, after looking at the report, we concluded that conspiracy theory or not, the federal government consumption expenditures saved the Q3 GDP figure from disappointing Wall Street.
Let's put it this way, of the 2.02% GDP growth rate, more than 72bps were contributed by federal government consumption; the first positive contribution since Q2 of last year.  Those 72bps represent a 9.6% annualized growth rate!  Of those 72bps, 65bps, or 90.2%, were on national defense; and that represented a 13.0% growth rate!  In addition, although government consumption on the state and local level continued to decline, it did so at a lower rate; from -1.0% in Q2 and -2.0% last year, to only -0.1%.
PCE represented 142bps of that 2.02% growth rate, which is positive but not very bullish, in our opinion.  Last year, PCE in Q3 represented over 90% of the GDP growth rate.  That figure is merely 70% for this year's Q3.  We must note that both goods and services contributed positively to the Q3 GDP growth.
In terms of net exports, the decline of 1.6% in exports was the first decline since Q1 2009.  This was driven by a significant 3.5% decline in exports of goods, the first decline since Q2 2009.  The 3.1% increase in exports of services partially offset the very disappointing goods exports.  Imports also declined; however, as usual, that decline contributed positively to the overall GDP growth rate.
In summary, while the headline GDP number was slightly better than the Street expected, we recommend not getting too excited about it as too much of it was driven by government consumption.  By the way, this is BEA's initial GDP growth rate estimate.  We expect this figure to be revised down the next time it is released, which will be approximately one month from now.

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