Main takeaways:
  • GDP is running above potential.
  • The good news is that GDI was revised up in Q2 (0.7% to 2.2%) and printed 3.1% in Q13 2015 and was revised up in Q2 (before revisions, GDI was running very weak -- a point which I mentioned as a concern last quarter).
  • The value of goods and services purchased by US residents is growing at 2.8%.
  • Fear of inventory overhang: too much ado... (details below).

Third quarter GDP was revised up by 0.6pp, close to market consensus.
As the table below highlights, the upward revision was mostly in inventories, partially offset by weaker net exports and services consumption.



US GDP increased 2.2% yoy in Q3; trend in the last 2 years is 2.5%

Domestic demand is growing at 2.8% yoy

The good news was that GDI was revised up; it appeared to be flat from Q4 2014 to Q2 2015 but that was revised away
Indeed, 2Q 15 GDI growth was revised up from 0.7% to 2.2% qoq and Q3 15 GDI initial print was 3.1% qoq.


The average of real GDP and real GDI increased 2.6 percent in the third quarter, compared with an increase of 3.0 percent (revised) in the second

Both GDP and GDI are growing at 2% yoy


Business value added slowed to 1.8% in Q3 15, but the overall 2.6% growth trend is unchanged

Inventories
There is a lot of concern regarding inventory accumulation in the US. JPM, for instance, wrote that
"The mix of growth, however, is now less favorable for Q4 GDP, as real final sales were revised down from 3.0% to 2.7%, while inventory building was revised up from a $57 billion pace to an unsustainably hot $90 billion rate. The bigger inventory overhang helps explain why manufacturing sentiment remains cautious early in the fourth quarter, and does present downside risk to our 2.5% estimate for current-quarter GDP growth."

There are indeed reasons to be concerned about short-term quarter-on-quarter growth outcomes. I have looked at inventory-to-sales ratio in manufacturing, wholesale and retail sectors, and the big jump observed from late 2014 into 2015 in all the sectors seem to be mostly related to the energy sector. Of course there are sectors in which inventory level is too high and will need to be adjusted. Clothing is an example. But I think that translating that concern into a big worry for the US economy may not be appropriate.

Let's take a look at the total economy.
The chart below shows that inventory accumulation in the Q3 2015 was 0.6% of final sales, which is elevated by historical standards (at least when comparing to the period of the great moderation).

So it may be the case that the pace of inventory accumulation slows down in the coming quarters. Since it's the change in inventory accumulation that impacts growth, it might be the case that inventories remain a drag to growth in the coming quarters. Indeed, the slowdown of inventory accumulation in the third quarter was already enough to subtract 0.6pp from growth (better than the initially reported drag of 1.4pp). If the current flow of inventory accumulation goes to zero over a one-year period, this would result in a drag of 0.8pp to GDP growth.

However, the actual level of inventories (as opposed to the pace of inventory accumulation) does not seem particularly high. The ratio of inventories to final sales (nonfarm inventories) did increase from 2.14 at the end of 2014 to 2.18 in Q3 2015, but the overall picture seems to be of a flat inventory to final sales ratio in the aftermath of the financial crisis.


A constant inventory-to-sales ratio at 2.18 would imply inventory accumulation of around $60bn, not very far from annualized pace of inventory accumulation observed in Q3 ($90bn). An adjustment to $60bn pace of inventory accumulation over a year would result in a small inventory drag to GDP growth of around 0.2pp over the same period.