Q3 GDP in the U.S.

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United States

US GDP growth in Q3 was 3% q/o/q annualized, better than the forecast of 2.6%. Also of note, the inflation deflator jumped by 2.2%, 5 tenths more than expected (goosed by energy prices) which means that nominal GDP was 5.2% vs the estimate of 4.3%. Thanks to a further drop in the savings rate to 3.4% (lowest since 2008) from 3.8% in Q2, personal spending rose 2.4%, higher than the estimate of up 2.1% with much of that in durable goods (likely helped by the boost in auto sales in September post Harvey). The negative hurricane impact was on the 5.2% drop in investment in ‘non residential structures.’ Capital spending continued to improve on both equipment and intellectual property and follows the recent better durable goods orders. Residential construction fell 6% annualized, partly depressed by Houston and Florida. Trade (strong export growth) added 4 tenths to GDP growth while there was no change from government spending. Inventory building was a key contributor to GDP growth in Q3 as it added 7 tenths to growth. Reflecting the influence of the inventory build, real final sales which excludes this was up by 2.3% vs 2.9% in Q2 and 2.7% in Q1. Also of note, final sales to private domestic buyers slowed to 2.2%, the weakest since Q1 2016, likely impacted in part from the hurricanes.

Bottom line, the headline GDP number was certainly encouraging to see in light of the rough impact from the hurricanes. But, a continued draw down in the savings rate is what is mostly driving consumption and inventories added 7 tenths to growth. Thus, real final sales was much more muted than the headline GDP print. The rise in the inflation deflator could very well be in response to the rise in commodity prices and supply constraints that the storms caused. There really wasn’t much of a response in US Treasuries to the upside beat. The 2 yr yield is up 1 bp 1.63% and the 10 yr yield is also up by 1 at 2.46%. The dollar is near the high of the morning.

UUP 6 Month