GDP: Leading indicators show positive momentum

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GDP
The 2.9% increase in real GDP during the third quarter reflected increases in exports, consumer spending, nonresidential fixed investment, state and local government spending and federal government spending.

A newly released report from the U.S. Bureau of Economic Analysis showed real gross domestic product (GDP) grew 2.9% in the third quarter—a figure that was stronger than expected and one that represents a reversal of the trends seen in the first two quarters of 2022. The third-quarter uptick comes on the heels of two consecutive quarters of economic contraction, including a 0.6% drop in GDP in the second quarter.

The 2.9% increase in real GDP during the third quarter reflected increases in exports, consumer spending, nonresidential fixed investment, state and local government spending and federal government spending—all of which were partly offset by decreases in residential fixed investment and private inventory investment as well as imports. The increase in exports reflected increases in both goods and services. The leading contributors to the increase were industrial supplies and materials (notably nondurable goods), “other” exports of goods and non-automotive capital goods.

In terms of export services, the increase in GDP was led by travel and other business services, mainly financial services. Within consumer spending, an increase in services—led by health care and other services—was partly offset by a decrease in goods, led by motor vehicles and parts as well as food and beverages, according to BEA. Within nonresidential fixed investment, increases in equipment and intellectual property products were partly offset by a palpable decrease in housing market activity. Meanwhile, the increase in state and local government spending was led by increases in compensation of state and local government employees and investment in structures. The increase in federal government spending was fueled by defense spending. On the whole, though, consumer spending decelerated, growing more slowly at a pace of 1.4%—down from a growth rate of 2% in the second quarter.

While many economists welcomed the news, some are advising caution against celebrating too soon. “Overall, while the 2.6% rebound in the third quarter more than reversed the decline in the first half of the year, we don’t expect this strength to be sustained,” said Paul Ashworth, chief North America economist at Capital Economics. “Exports will soon fade and domestic demand is getting crushed under the weight of higher interest rates.”

Labor market holds steady

Separately, the latest report from the Bureau of Labor Statistics shows the U.S. unemployment rate holding at an historically low rate of 3.7%—a sign that many employers are still hiring aggressively despite uncertainty surrounding the impact of stubbornly high inflation and what many argue as overcompensation by the Federal Reserve to tamp down that inflation.

The perennially low unemployment rate, observers say, reflect the resiliency of the U.S. job market two and a half years following the pandemic. Outside of a few major tech players (and recent layoffs by Pepsi Co.) hiring has remained steady and job openings remain plentiful. In principle, an unemployment rate below 4% means anyone who is looking for work can reasonably find a job—providing the candidate’s experience is in line with the specific skills employers are looking for.

According to the Bureau of Labor Statistics, total nonfarm payroll employment increased by 263,000 in November, roughly in line with average growth over the prior three months (+282,000). Monthly job growth has averaged 392,000 thus far in 2022, compared with 562,000 per month in 2021.

How things shook out: Leisure and hospitality added 88,000 jobs in November, including a gain of 62,000 in food services and drinking establishments. Note: Employment in leisure and hospitality is below its pre-pandemic February 2020 level by 980,000, or 5.8%

Construction employment continued to trend up in November (+20,000), with nonresidential building adding 8,000 jobs. Employment in information services rose by 19,000 in November; jobs in this sector have increased by an average of 14,000 per month thus far this year, in line with the average of 16,000 per month in 2021.

Employment in the bellwether manufacturing sector continued to trend up in November (+14,000). Job growth has averaged 34,000 per month thus far this year, up a tick from the 2021 average of 30,000 per month. Meanwhile, employment in financial activities continued its upward trend (+14,000). Job gains were seen in real estate and rental and leasing (+13,000) and in securities, commodity contracts and investments (+6,000). These were partially offset by a decline in credit intermediation and related activities (-9,000). Employment in financial activities has increased by an average of 12,000 per month thus far this year, the same as in 2021.

Employment in retail declined by 30,000 in November. These included job losses in general merchandise stores (-32,000), electronics and appliance stores (-4,000), and furniture and home furnishings stores (-3,000). However, there were job gains in motor vehicle and parts dealers (+10,000). Retail trade employment has fallen by 62,000 since August.

Elliott Eisenberg (a.k.a the “Bowtie Economist” and president of Graphs & Laughs), said the latest jobs report offers a mixed bag. “November net job growth was strong at 263,000. While it’s the weakest number this year, signaling a softening market, it’s still way too strong. Month over month, wage growth rose a very robust 0.6%, the highest rate since October 2021. Moreover, the labor force participation rate has now declined for three straight months and is at its lowest reading in almost a year. This gives the Fed permission to keep raising rates.”

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Dec. 5/12, 2022

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