The good news is straightforward. Real GDP grew in the third quarter. We expected growth, but the advanced data point came in 1.3% higher than our forecast average (3MMA basis). Going back a year ago and adjusting for the data revision, the result was 1.5% higher than the projected average. Looking at the top-line results, we agree with the reports that personal consumption expenditures was the single-greatest broad category of activity to drive growth. Looking a little deeper, it was Household Expenditures for Services that proved to be the significant source of lift, more so than the purchase of goods. Household Expenditures for Services includes such line items as housing (e.g., rent) and utilities, health care, transportation services, recreation, food services, and financial services.
Below is a list of the areas that contributed the most to the rise in GDP, in order of magnitude of the lift.
Increasing inventories as the second-greatest contributor to rise catches the eye because rising inventories in general are associated with a warning sign for future manufacturing when the consumer is facing the economic headwinds of high interest rates, tightening lending conditions, and declining real savings.
But it is not just that inventories pushed GDP higher that is worth noting. It is important to note that Fixed Investment in capital equipment was a negative contributor in third-quarter GDP. That is not a sign of a positive business environment; however, it is consistent with the warning we have laid out regarding what weakening corporate profits and the related decline in capital goods new orders mean for the future.
We do not subscribe to the notion that consumers in general are “hurting” right now. Real incomes are rising, and debt service is quite manageable through the September data. Perhaps the better test occurs beginning in October when some student loans need to start being serviced. Looking at just the third-quarter data, notice from the list above that the consumer was not buying goods nearly as much as they were buying “services” such as rent, utility bills, insurance bills, transportation – in other words, a lot of largely non-discretionary spending. All else being equal, that leaves less money available to enjoy on discretionary spending. It could be that facet that may be making the consumer reportedly grouchy.
Keep in mind also that even among the purchase of “goods,” all is not equal. Using September Retail Sales data and the associated 3/12 rates-of-change shows that Light Vehicle Retail Sales were soaring in the third quarter, while hardware stores were weak. The data is in nominal dollars, so it includes the effects of inflation upon prices. Regarding “strength,” keep in mind, as Alan Beaulieu noted several weeks ago, that the seasonal rise to date in Total Retail Sales is milder than in each of the last four years.
| Category | Sept 2023 3/12 | 10-year average pre-COVID |
| Total Retail Sales | 2.9% | 4.3% |
| Retail Sales Excluding Food | 2.0% | 4.1% |
| General Merchandise Stores | 2.7% | 2.0% |
| Light Vehicle Retail Sales | 16.8% | 5.4% |
| Building Materials & Supplies Dealers | -4.2% | 3.7% |
| Groceries | 2.0% | 3.1% |
| Liquor | 2.2% | 3.5% |
| E-Commerce | 7.7% | 14.7% |
The above list of slices of retail sales shows that the September 2023 retail sales results are running below the pre-COVID 10-year average except for General Merchandise Retail Sales and Light Vehicle Retail Sales. We seem to be making decidedly fewer home improvements or at least lower-value home improvements. The comparisons above, with the exception of Light Vehicle Retail Sales, do not speak to a surge in consumer activity in the third quarter.
It is our opinion that the Fed does not need to raise interest rates again to achieve its vaunted inflation goal in 2024. There are sufficient headwinds in the US and the rest of the world to indicate diminishing demand and a slackening in price inflation.
Our concern is that the Fed FOMC will look at the 3Q23 Real GDP result and use it as a reason for pushing the fed funds rate higher in either November or December. Doing that will simply mean that the Fed will need to lower the fed funds rate an additional 25 basis points over the course of 2024 if we are to see a normalization in the yield curve. Possible to achieve, but we think it would be best not to make the corrective action more difficult than it needs to be.