Analysts and economists were disappointed this week after U.S. economic growth was revised upward. And why is that, you might ask.
On the surface, it was an impressive number indeed: for third-quarter 2013, U.S. Gross Domestic Product (GDP) climbed at an annualized rate of 3.6% — much higher than the initial estimate of 2.8% — and up from 2.5% growth in the second quarter. Given the surprising strength of the headline number and the distinct lack of enthusiasm it generated, I thought a few words and a chart might help put the news in perspective.
The main driver of third-quarter GDP growth was a buildup in inventories. Inventory levels are highly cyclical, so a surge in Q3 – as merchants stock up for holiday shoppers — may well be followed by a sharp decline in Q4 and perhaps into the first quarter of 2014 as well. Producing, packaging, transporting and storing all sorts of goods is good in many ways, including for employment. But unless the inventory is sold at a profit, the boost is typically short-lived.
So the question is: Will there be enough demand to profitably sell all this new inventory?
Supply vs. Demand
For insight, let’s look at final sales of “product” (both goods and services). As the chart suggests, sales did not improve in the third quarter. In fact, growth in “real” (inflation-adjusted) final sales – aka global sales of all goods and services produced in the U.S. — has trended near 2.0% annualized the last three years. This isn’t too bad. But it’s definitely not at the heady level of 3.6% or even 2.5%.
The discrepancy lends support to expectations that both inventory levels and GDP will be revised downward in subsequent quarters. In fact, many economists have already lowered their Q4 GDP estimates to roughly +1.0%, based on the buildup in inventory and lackluster holiday-shopping data so far.
We at LNWM continue to expect slow and uneven U.S. economic growth. Regardless of the headlines, a sustainable bump up in U.S. growth requires a rising level of consumption, indications of which we have not yet seen. Hence the little cheer.