–Residential Fixed Investment -29.1%; Core PCE prices +1.0%

By Joseph Plocek

WASHINGTON (MNI) – The Q3 GDP report was about as expected as real
growth picked up to +2.0%, but real final sales slowed to +0.6%.

Inventories added 1.44 points in a fifth consecutive advance as
sales remain slow. This portends slower growth: inventories should
eventually slow or dip if demand does not surge.

The Commerce Department assumed higher inventories and a steady
trade gap for missing data.

Key to Q3 demand slowing was the -29.1% posted for residential
fixed investment as the homebuyer tax credit ended. Residential
investment had posted +25.7% in Q2, reflecting a rush to close home
sales.

Another trend is state and local government spending at -0.2% as
budgets were cut. The outlook for these categories is mixed: there are
signs of stabilization in housing but budgets will remain under pressure
as home prices fail to re-inflate.

Federal stimulus programs continue to impact the GDP accounts. The
Commerce Department estimated the stimulus laws resulted in personal
taxes being lowered about $120 billion in Q3 and benefits raised about
$60 billion. Grants and transfers to state and local governments were
about $143 billion, and Federal outlays were about $30 billion. These
effects are incorporated into consumption, government and investment in
the accounts.

Personal consumption was up 2.6% in Q3, its best gain since
Q4:2006. Spending on food and durable goods (especially recreational
goods) surged, as did utilities costs in services.

Business spending was strong on nonresidential structures (+$31.9
billion) and equipment & software (+$30.1 billion).

Prices remain subdued though in an uptick: core PCE prices printed
+1.0% and the GDP price index printed +2.3% overall. The chain weight
index for domestic purchases was +0.8%.

As Q4 begins, strong Halloween sales and reports that housing is
stabilizing give hope that growth will continue. But the build-up of
inventories without a commensurate surge in demand might mean that
growth remains moderate. Next week’s October auto and chain store
results will give the first clues about how growth is shaping up.

GDP Components: Q4:09 Q1 Q2 Q3 Advance
Real growth +5.0% +3.7% +1.7% +2.0%
Real final sales +2.1 +1.1 +0.9 +0.6
PCE +0.9 +1.9 +2.2 +2.6
Nonres fixed invest -1.4 +7.8 +17.2 +9.7
Res fixed invest -0.8 -12.3 +25.7 -29.1
Net Exports Contrib add 1.90 cut 0.31 cut 3.50 cut 2.01
Inventory Contrib add 2.83 add 2.64 add 0.82 add 1.44

**Market News International Washington Bureau: (202)371-2121**

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