U.S. GDP Revised Downward:Domestic Demand & Inventories Are Shaved

The second revision to 3Q U.S. real GDP lowered growth again, this time to 2.2% (AR) from last month's report of 2.9% growth. The revised figure compares to the advance report of 3.5% growth and was contrary to expectations for an improvement to 2.8%. Still, growth last quarter was the first positive figure since 4Q 2007. Estimates of economic growth this quarter recently have been rising to roughly 4.0%.

The largest surprise in the revision was that domestic final demand growth was again revised down, to 2.3% from 2.7%. On the fixed-investment side, business fixed investment fell at an increased 5.9% (-19.6% y/y) rate. The quarterly rise in residential spending was reduced to 18.9% (-18.9% y/y) and government investment grew at a reduced 2.7% rate (2.0% y/y). Real PCE growth was little changed at 2.8% (-0.2% y/y).

Another surprise in the figures was that the 3Q contribution to GDP growth from inventories was revised lower to 0.7 percentage points. Nevertheless, the 3Q addition followed subtractions of 1.4 and 2.4 percentage points during the prior two quarters, and was just the second positive contribution to GDP growth in two years.

Accompanying the GDP figure was a little-revised estimate that 3Q corporate profits rose 10.8% versus 2Q. That was the third consecutive quarterly increase and diminished the y/y change to -6.6% from -25.1% at its worst in 4Q' 08. Lower market interest rates lifted earnings in the financial sector by more than one-third (20.5% y/y) and they tripled from year-end '08. Earnings from the rest of the world increased 7.3% (-18.6% y/y) while the end of the recession raised domestic nonfinancial profits by an upwardly revised 4.2% (-10.6% y/y) for the second quarterly increase.

Deterioration in the foreign trade deficit subtracted an unrevised 0.8 percentage points from 3Q GDP growth following an advance estimate of a  0.5% subtraction. Imports grew 21.3% (-14.0% y/y) and the gain in exports also was little-revised at 17.8% (-10.7% y/y).

The gain in the GDP price deflator was lowered slightly to 0.4%. The PCE price index was ticked lower to 2.6% (-0.7% y/y) and the rise in the overall domestic final sales price index was brought down to 1.4% (-1.0% y/y).

The U.S. National Income & Product Account data are available in Haver's USECON and the USNA databases. 

Improvement in housing prices continued this fall according the U.S. House Price Index from the Federal Housing and Finance Agency (FHFA). The Purchase Only Index for October rose 0.6% and reversed its September. Nevertheless, the year-to-year decline in the nationwide average of home prices eased to -1.9% from its worst reading of -8.8% last November. Since their peak in early-2007 home prices nationwide have fallen 10.7%. The FHFA uses data provided by Fannie Mae and Freddie Mac and is not value-weighted.

The HPI is calculated using a repeat sales index. That means that the HPI measures changes in the price of the same property over time but does not measure changes in property types over time. So if, for example, the price of a larger, new home was not growing very rapidly, but the number of people transitioning from smaller homes to larger homes greatly increased, median house prices would go up (people buying more expensive houses) much more than the HPI. In this way, the HPI is a better measure of how any particular home is appreciating while the median house price is a better measure of what the typical home buyer is paying.

Notable monthly gains in home prices during October were logged in the Pacific, Middle Atlantic and the East South Central regions of the country and the y/y declines have moderated significantly. In the populous East North Central region prices slipped another 0.6% during October and they were flat year-to-date. Prices also fell sharply in the South Atlantic region to the lowest level since 2004.

According to the latest GfK* survey, the German Consumer Climate is cooling, not that it was recently especially warm. Based on consumers' appraisals of the outlooks for the economy and their personal situation and their willingness to spend in the current month, GfK forecasts the Consumer Climate in the month ahead. Currently, they are forecasting a decline in the Consumer Climate Indicator to 3.3% in January. This is the third decline in the indicator from the 4.2% reached in October, 2009. Since it began in January, 2002, the indicator has been within a fairly narrow range, from a high of 9.1% recorded in November and December of 2006 to a low of -3.5%, recorded in March, 2003.

The balance of opinion of German Consumers on Economic Expectations improved from -1.7% in November to 0.9% in December, but was still well below the 8.7% of October. The balance of opinion on Income Expectations more than doubled from 6.2% in November to 15.0% in December. However, the balance of opinion on the Consumption and Buying Propensity declined significantly from 26.3% in November to 21.1% in December and is now well below the recent peak of 36.5% in September. It appears that the decline in the balance of opinion on the Consumption and Buying Propensity is the major cause of the decline in the Consumer Climate.

The component parts of the Climate Indicator have shown much greater variation than the over all indicator. In contrast to the narrow range of the Consumer Climate indicator, cited above, the balance of opinion on Economic Expectations has ranged from a high of 69.5% in May, 2007 to a low of -32/9 in January, 2009. The balance of opinion for Income Expectations has ranged from 33.6% in May 2007 to -24.5% in November, 2002 and for Consumption and Buying Propensity, from a high of 64.4% in October 2006. to a low of -55.4% in November 2002. All four indicators are shown in the attached chart.*GfK Gesellschaft fur Konsumforschung (Company for Consumer Research)