GDP’s growth in Q3 was revised down marginally in the final estimate to 3.8% from 4% previously. Growth was chipped away in a number of sectors including structures and exports while imports were revised higher. Imports drain growth form the economy. GDP’s sojourn above trend in the current quarter was not on fundamental growth. Inventories rose instead of falling. The trade gap was sharply smaller instead of progressively wider. Consumption, the mainstay of GDP, shrank sharply, yet despite that business investment was stronger as GDP’s smaller sectors pushed growth above trend – especially inventories and trade. But consumer spending is two-thirds –or more– of GDP and the economy will not be able to carry strong growth on weak consumer spending. The growth spurt in Q2 was an anomaly - but so was the extreme weakness in Q1.

As the Fed looks at GDP it too is in a quandary. To make forward-looking policy you must be able to see ahead. Right now the trend in productivity is not heartening. Consumer spending has been weak and still looks soft. Vehicle sales show no life and other consumer spending generally has been soft. The August job report showed job creation turn negative. Looking ahead the Fed can’t be sure what happens next. Modest growth is the best guess but risks, mostly to the downside, are in play.

Housing’s slump is now thought to be a longer lived phenomenon than before. But layoff contagion has not hit hard – yet. Jobless claims fell to below the 300K leaving the Sept 22 week with a very strong labor market reading. So even late in Q3 the job market does not seem to have softened judging from jobless claims and despite the drop in employment In August.

On data like this it may be that the Fed is DONE cutting rates. The Fed said its…‘action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.’ The Fed seems to have achieved that goal now. It is not trying to prompt strong growth, just to forestall weak growth. I would judge it to be ‘content’ with the economic results we have seen to date and would expect it to do nothing more...depending on incoming data, of course.