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Some estimates for Q3 real GDP growth had been flying high after the 4.2 percent growth rate was reported for Q2.



Comerica Economic Weekly, September 28, 2018

September 28, 2018
By Robert A. Dye, Ph.D., Daniel Sanabria

 Some estimates for Q3 real GDP growth had been flying high after the 4.2 percent growth rate was reported for Q2. An inventory rebound in Q3 could still push GDP growth above the strong Q2 rate. However, data from this week suggests that Q3 growth is more likely to step down, closer to 3 percent. We published a 3.1 percent real GDP growth rate for Q3 in our September U.S. Economic Outlook.

The culprit is trade. The advance trade data for August shows that the merchandise trade deficit (excluding services) widened by $3.8 billion. It now looks like trade will subtract about a full percentage point from real GDP growth in Q3.

There is still upside risk from inventories. Nominal wholesale inventories were up by 0.8 percent in August, while retail inventories gained 0.7 percent.

Nominal personal income was up by 0.3 percent in August, netting a 0.2 percent gain for real disposable income. Real consumer spending increased by 0.2 percent in August after a 0.3 percent gain in July. It looks like growth in consumer spending for Q3 will ease from the strong 3.8 percent rate from Q2. The Personal Consumption Expenditure (PCE) Price Index for August was sedate, increasing by 0.1 percent for the month while the core PCE prices were even cooler, unchanged for the month.

New orders for durable goods rebounded in August, up 4.5 percent after falling by 1.2 percent in July. Both defense and commercial aircraft orders generated the volatility. Core durable goods orders, nondefense capital goods excluding aircraft, eased by 0.5 percent.

Initial claims for unemployment insurance bumped up by 12,000 for the week ending September 22, to hit a still-very-low 214,000.  Both North Carolina and South Carolina showed a strong increase in initial claims, likely as a result of Hurricane Florence. Continuing claims increased by 16,000 for the week ending September 15, to hit 1,661,000.

The 12-month increase in the Case-Shiller U.S. National House Price Index slowed to 6.0 percent in July. The 20-city data showed some cities slipping in July. Dallas house prices lost 0.1 percent for the month.

New homes sales improved in August, up 3.5 percent to a 629,000 unit annual rate. The trend still looks soft. The inventory of new homes for sales eased to a moderate 6.1 months’ worth. The median sales prices of a new home fell to $320,200. This does not account for size and quality changes.

Consumers felt good in September. The Conference Board’s Consumer Confidence Index showed a noticeable 3.7 point increase to 138.4 in September, on the heels of a large increase in August. This metric is hovering near an 18-year high.

The Federal Reserve raised the fed funds rate range to 2.00-2.25 percent as expected. They also kept the Interest Rate on Excess Reserve slightly below the fed funds rate, raising it to 2.20 percent. In October the Fed will ramp up the amount of maturing bonds that it will allow to roll off its balance sheet, to a maximum rate of $50 billion per month. The Fed has not disclosed its final target for bond holdings.

Less reinvestment by the Fed, the end of net asset purchases by the European Central Bank by the end of this year, and then ECB rate increases after mid-year 2019 will all put upward pressure on global bond yields.

 

For a PDF version of this report, click here:  Comerica Economic Weekly, September 28, 2018

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