Main takeaways:
  • The third release of 3Q GDP didn't change the overall picture.
  • Given the weakness in some recent economic and financial indicators it is important to track credit and discretionary spending for signs of a turning point.
  • The current 2% pace of GDP growth is still likely enough to reduce labor market slack.
  • Domestic demand is growing at a healthy 3%; household consumption also growing at 3%.
  • Investment (ex. oil) is growing at 6% pace.
  • Government consumption and investment bottomed in 2014 (after being a drag in the 2011-2013) and will likely continue to add to growth next year.

GDP revised down a tenth to 2.0%; real GDI revised down four tenths to 2.7%.
Third quarter GDP was revised down by 0.1pp, a bit better than market consensus. The small downward revision to the percent change in real GDP primarily reflected a downward revision to private inventory investment.


GDP: heading towards recession?
Given the weakness in some recent economic and financial indicators, it is interesting to look at some charts that historically have shown turning points in the economy.

The flow of credit to the economy (as a share of GDP) often -- but not always -- peaks ahead of or coincidently with recessions. The chart below shows that, overall, credit flows are at a relatively modest pace for both corporates and households (compared to the history since 1970). Nevertheless, the pace of credit creation has slowed for households since 1Q and nonfinancial corporates since 2Q. Bank lending data at a higher frequency (weekly) does not suggest a material slowdown in credit, but this bears watching given the sharp widening of HY spreads.

Another point worth looking is the strength in discretionary spending. One way to look at it is to calculate the ratio of growth in spending on consumer durables and private investment to final sales growth (the "Duncan" indicator). The chart below shows that this indicator usually turns down before the recession (shaded areas in the chart). The first chart considers total private investment and the second excludes investment in the energy sector. So far discretionary spending is not signaling an impending recession.


Another way to look at discretionary spending is to look at the share of the income spent on those items. The chart below highlights that consumption of durable goods and investment is still at low level as a share of income. Even excluding residential investment, it seems that the share of discretionary spending in total income is low. Excluding housing and energy, one can see that the share of discretionary consumption/investment is still increasing.

GDP Chart pack
GDP is running above potential...
GDP increased 2.1% yoy in 3Q; trend in the last 2 years is 2.5%


GDP and real GDI (gross domestic income) are both growing at around 2% yoy.


GDP excluding inventories is growing at 2.5% in the last 2 years and 2.1%yoy

The value of goods and services purchased by US residents (regardless of where goods and services were produced) excluding inventories is growing at a healthy 2.9% since mid-2014.

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

GDP breakdown: Consumption
Consumption is growing at 3% (constant prices)


Core consumption (excluding energy and food) is even a bit higher.

GDP breakdown: Investment
The annual pace of investment growth is slowing...


...but recall that there is a collapse in investment in the oil sector.

Excluding oil sector, overall investment picture is improving, with annual growth rates at 6%. Note that this is not far away from the pace of investment growth before the great recession.

GDP breakdown: External trade
Exports slowed materially, likely due to global growth slowdown and dollar strengthening...


...while imports are growing at a healthy 5% pace.


GDP breakdown: government
Government consumption and investment bottomed in 2014 and will likely continue to add to growth next year.