Strong Economic Data and Encouraging Fedspeak

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Special Guest Blogger: Tim Kearney

The U.S. economy continues to chug along. Third-quarter GDP printed at 3.5%, above expectations, taking the year-over-year (YoY) growth rate to 3%. (It was 1.3% in 2Q18.) Looming trade concerns might have prompted a 9% rise in real imports with trade subtracting 1.8% from growth. Business fixed investment was softer, at a 0.8% seasonally adjusted annual rate, though the YoY rate was up a solid 6.4%. With the PCE deflator rising by 1.7%, the economy printed another 5% nominal growth rate; the 2010–16 average was below 4%.

The September income/spending reports showed strong consumer positioning. Personal income was up 4.4% YoY, with real disposable income up 2.9%. Real personal consumption expenditures (PCE) rose 3% YoY, spurred by a 6.4% rise in durable real spending. Core PCE (which excludes food and energy prices) and the PCE deflator rose 2% YoY, but in 3Q18 were below 2% for both the deflator (1.5%) and the core (1.4%). Good stuff.

Durable goods continued to rise sharply: on a YoY basis, September showed total orders up 7.9%, ex-defense up 6.2% and ex-transportation up 5.9%. As I have previously noted, the tax cut → investment → productivity → trend growth firing sequence will determine the investment outlook for years.

In a speech/interview last week, Federal Reserve Vice Chairman Richard Clarida made a strong statement, noting that the economy is “very, very solid.” Music to his ears, he said, that “trend growth in the economy may well be faster and the structural rate of unemployment lower” than previously assessed. Importantly, while he endorsed the idea that the Fed is likely to give us some further, gradual rate hikes, he took down the temperature on the idea that we are far from neutral. I would rate Clarida’s comments not so much “dovish” as “realistic,” a risk management approach without a pause in the short term; net/net, a positive speech.

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