GDP Will Rebound for Q3, But Not Nearly Enough

After the 31.4% plunge in second quarter GDP, there is no doubt that economic growth partially rebounded in the third quarter, data to be released Thursday will show. Consumption, home building and business activity all improved drastically from the lockdown-period of the previous quarter.

But it will be a while until the economy completely gets back to normal.

Three closely watched GDP Nowcast measures, which attempt to forecast GDP in real time, all predict a double-digit gain. The Atlanta Fed’s measure was the highest, looking for an increase of over 30%.

The retail sales data have been very solid over the last three months, ending on an up-note in September with an outsized gain. Through August, third quarter real PCE was running 37% above the second quarter average, so the addition of the strong September retail sales data will widen that gap.

At the same time, home construction surged in the quarter due to strong demand and inventories ticked up in the first two months of the quarter after being depleted in the previous quarter.

There are a few offsets, however, that will make those forecasts of a 30% rebound too optimistic. Along with increased international trade in the quarter comes a larger net export deficit. The trade data released to this point show increasingly larger gaps in both July and August.

Advance inventory and trade readings for September will be released on Wednesday.

Likewise, the shift toward telework may have lifted home building, but it also had a negative effect on non-residential building for offices, as well as investment in software and equipment by businesses.

Finally, government spending likely slipped back after a 2.5% increase in the second quarter. That increase was driven by the first shot of stimulus measures at the Federal level that more than offset a decline at the state and local level. While stimulus payments continued into the third quarter, outlays slowed after the initial surge.

Income, spending growth maintain upward trend in September

Employment and retail sales data point to increased personal income and consumption in September. The data released on Friday will be incorporated into the Thursday’s GDP report.

Non-farm payrolls rose by only 661,000 in September after much larger gains in July and August, but, along with a longer factory workweek and an uptick in hourly earnings, should still lift wages and salaries.

However, the continued decline in initial claims filings and the expiration of enhanced Federal benefits will further reduce the state unemployment payments category.

The “other” current transfer receipts category, which includes the direct stimulus payments to households, will not be lifted by any new stimulus measures.

The proprietors’ income category, however, will be boosted by strong retail sales in September.

Retail control group sales, which exclude motor vehicles, gasoline, building materials and food services, feed directly into the PCE measures. That category rose by 1.5% in September after a 0.4% decline in August. As a result, PCE growth is likely to accelerate this month.

Consumer prices posted a more modest increase in September, so both overall and core PCE prices should be up only slightly and keep the year/year rates below 2%.

With nominal PCE expected to rise further, real PCE should post another increase in September that will feed into the quarterly GDP measure.

Regional data point to faster manufacturing and services growth

The regional data released to this point suggest that both the factory and services sectors improved in October.

For manufacturing, the Empire State Index did slip in the month, but the Philadelphia Fed reading surged and the Kansas City Fed’s reading ticked up.

As for services, the Philadelphia Fed’s reading rose sharply, and the Kansas City Fed’s index jumped back into positive territory after pulling back in September.

The first look at national data from Markit showed only a slight uptick for manufacturing, but the services reading was the strongest since the start of the COVID-19 crisis.

Coming up this week, the Dallas Fed will release its manufacturing data on Monday and nonmanufacturing data on Tuesday. The impact of several hurricanes in the Gulf region may be seen in this week’s data after solid gains in September.

The Richmond Fed’s data for both manufacturing and services will be released on Tuesday. The region also saw improvement in September and could continue its upward trend in October.

The last piece of regional data released before the following week’s national data is the Chicago PMI reading on Friday. That reading surged to a recent high in September, so an October decline is possible.

US Manufacturing and Non-manufacturing Conditions
Sources as listed

Election rhetoric, lack of stimulus holding back confidence

The University of Michigan reported another increase in the preliminary measure of sentiment for October last week, but that gain was primarily due to optimism for conditions down the road. In contrast, the assessment of current conditions pulled back, reflecting the election season and the lack of a new stimulus package.

Expectations for the Conference Board’s confidence reading on Tuesday and the revision to the Michigan reading on Friday will reflect events later in the month. Last night’s final presidential debate was less chaotic than the first meeting, but still contentious, and there appears to be little thawing in the cool relations between Republicans and Democrats on the Hill regarding further pandemic assistance.

Housing market remains the economy’s backbone

The September home construction and existing homes sales data released this week were overwhelmingly positive.

Both housing starts and building permits surged in September, based on data released on Tuesday, with a solid gain in completions adding to the severely depleted supply of homes for purchase.

In keeping with the recent trend, single-family home construction surged, while builders slowed the pace of multi-family construction.

The existing home sales data for September released on Thursday showed the sector is not slowing after several monthly gains, with sales of single-family and multi-family sales both up sharply.

The median existing home sales price also spiked in the month. The NAR repeated that increased supply is needed to return prices to more affordable levels, especially for first time buyers.

Data on September new home sales will be released on Monday and is expected to increase for a fifth straight month based on weekly mortgage application data. Near record low mortgage rates continue to fuel demand.

The one negative factor is the effect that the demand is having on prices. Several housing agencies, including the NAR, have expressed concern that the lack of affordable housing has kept some buyers out of the market and that increased supply is needed to meet the extraordinarily strong demand pace.

The Case-Shiller and FHFA home price measures will both be released on Tuesday morning and should show accelerated prices gains.

Initial claims returned to its declining trend

The level of initial claims fell by 55,000 to 787,000 in the October 17 week after a jump of 75,000 in the previous week, returning the series to its downward path. With California now reporting actual figures, the data are also more reliable.

The four-week moving average fell by 21,500 to 811,250. The average has declined for 12 straight weeks now that the actual data from California revised the levels in previous weeks.

However, the declines don’t necessarily suggest improvement in the labour market, as the downward trend started when federal government benefits expired, giving less incentive to initially file.

In addition, continuing claims have fallen sharply in recent weeks, as much an indication of expiring benefits as increased hiring.

Initial claims are likely to decline further in the October 24 week data released next week and as a result pull the four-week moving average lower, but the level could rebound in the near future if further stimulus measures do not include an extension of extraordinary unemployment benefits.

Here are the key data events for the coming week (U.S. Eastern Time):

MONDAY, OCT. 26                                                   

 8:30 am         Chicago Fed national activity index (Sept)
10:00 am        New home sales (Sept)
10:30 am        Dallas Fed Manufacturing Index (Oct)

TUESDAY, OCT. 27                                                 

 8:30 am         Durable goods orders (Sept)
8:55 am         Redbook Same Store Sales (Oct 24 Week)
9:00 am         Case-Shiller home price index (Aug)
9:00 am         FHFA home price index (Aug)
10:00 am        Consumer confidence index (Oct)
10:00 am        Home Vacancies (Q3)
10:00 am        Richmond Manufacturing Index (Oct)
10:30 am        Dallas Fed Nonmanufacturing Index (Oct)


 7:00 am          Mortgage Bankers Weekly Applications (Oct 23 Week)
8:30 am          Advance trade, inventories (Sept)

THURSDAY, OCT. 29                                                          

 8:30 am          Gross domestic product (Q3 Adv)
8:30 am          Initial jobless claims (Oct 24 week)
10:00 am         Pending home sales index  (Sept)

FRIDAY, OCT. 30                                                     

 8:30 am          Personal income and Spending
8:30 am          Employment cost index (Q3)
9:45 am          Chicago PMI (Oct)
10:00 am         Michigan consumer sentiment index (Oct final)
1:00 pm          Baker-Hughes Rig Count

Separately, from Exante Analytics, the upcoming week’s SPX outlook is for stubbornly persistent hopes for a stimulus package to keep holding off severe pessimism:

Kevin Kastner

Julie Ros
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Julie Ros

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