–Commce Dept Assumes Sept Higher Invty, Wider Trade Gap; Farm Invty Cut

By Joseph Plocek

WASHINGTON (MNI) – The U.S. Q3 GDP report showed additional modest
real growth of +2.0%, slightly more than expected, but with a surprise
almost-turnaround in state and local government finances and declining
farm inventories having opposite effects in the report.

The Q3 real GDP number of +2.0% included real final sales at +2.1%,
also slightly better than expected. Rising personal consumption and
residential spending supported growth, a very favorable combination that
suggests the consumer is reacting more to low interest rates and
deleveraging than to events in Europe or the fiscal cliff.

The 2.0% consumption gain reflected auto and recreational vehicle
buying that put durables spending up 8.5% after a slip in Q2. A gain in
clothing sales was a mainstay of nondurables spending, which posted
+2.4%. Services spending was up just 0.8% as finance and healthcare
spending fell.

A surprise was the 3.7% jump in overall government spending.
Federal spending printed +9.6%, mainly on the back of defense spending
perhaps related to the fiscal year-end, and state and local spending
printed -0.1% as budgets stabilized. That was the best showing for S&L
spending since Q3:2009 and was the twelfth quarterly drop in a row.

The Commerce Department assumed higher inventories, more
construction, and a wider trade gap (a jump in imports) for missing
September data. These estimates mainly added to the totals.

Private inventories subtracted 0.12 point from GDP. Farm
inventories were responsible as they cut 0.42 point (-$29 billion);
nonfarm inventories added 0.30 point, suggesting there was some
overhang in industry as the quarter ended.

The Commerce Department said for the most part effects of the
summer’s drought were embedded in the source data, and possibly lowered
consumption and exports. Crop insurance payments to farmers (about $15
billion, recorded as a transfer to avoid a GDP effect) may have offset
some of the subtraction to income. As a result, the drought’s impact on
income was less than the impact on inventories.

GDP prices printed +2.8% and core PCE prices +1.3%. The price index
for gross domestic purchases was +1.5%.

Looking ahead, Q4 consumption should shape up to continue to
support growth. But business investment, which posted -1.3% in Q3, could
continue to drop as firms worry about the outlook. The Q3 cutbacks were
widespread — business spending on computers & software, transportation
equipment, and structures were all pared, and there is no reason to
think this behavior suddenly will reverse. Thus the outlook is for
additional modest real growth.

A table of some GDP components for recent periods is below.

GDP Components: Q3 Q4:11 Q1:12 Q2 Q3 prelim
Real growth +1.3% +4.1% +2.0% +1.3% +2.0%
Real final sales +2.3 +1.5 +2.4 +1.7 +2.1
PCE +1.7 +2.0 +2.4 +1.5 +2.0
Nonres fixed invest +19.0 +9.5 +7.5 +3.6 -1.3
Res fixed invest +1.4 +12.1 +20.5 +8.5 +14.4
Net Exprt Contrib add 0.02 cut 0.64 add 0.06 add 0.23 cut 0.18
Inventory Contrib cut 1.07 add 2.53 cut 0.39 cut 0.46 cut 0.12

**MNI Washington Bureau: (202)371-2121**

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