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U.S. Economy Roars Ahead on Consumer Spending

Posted by Joseph Trevisani on Dec 23, 2014 2:03:00 PM

The U.S. economy accelerated the third quarter as consumer and businesses spending kicked into high gear fueling the strongest growth in eleven years. 

Gross domestic product, the broadest measure of economic activity, expanded at a 5 percent annual rate from July through September in the third and last revision by the Bureau of Economic Analysis (BEA) of the Commerce Department. This was up from the 4.6 percent rate in the second quarter and the fastest individual quarter since the 6.9 percent surge in his third quarter of 2003. The initial estimate of 3.5 percent issued in October was adjusted to 3.9 percent last month. Economists had forecast 4.3 percent. 

The American economy has now expanded at a 2.5 percent pace through the first three quarters. Since the 2.1 percent decline in the first quarter, the subsequent 4.8 percent pace has been the fastest six months since the last half of 2003. 

Equiites climbed sharply on the news with the Dow topping 18,000 for the first time. The euro dropped as low as 1.2164 against the dollar, its weakest in two and a half years as the Dollar/Yen  jumped to 120.82 less than a figure short of its more than five year high of 121.69 set earlier in the month. 

Consumer spending rose at a seasonally adjusted annual rate of 3.2 percent in the third quarter, revised up from 2.2 percent and surpassing the 2.5 percent expansion in the prior quarter. Expenditures were led by a 12.1 percent surge in health care, by far the biggest this year which contributed 0.52 percentage points to GDP. 

The Federal Reserve expects 2.3 percent to 2.4 percent growth for the entire year according to their latest December projections, up from 2.0 percent to 2.2 percent as estimated in September.

The Commerce Department will release its first estimate of fourth quarter GDP, which ends next week, on January 30th.

Business spending, as gauged by fixed nonresidential investment, was also adjusted higher. Construction spending rose at a 4.8 percent pace in the third quarter, up from 1.1 percent. Spending on intellectual property, software and the like climbed 8.8 percent versus an earlier estimate of a 6.4 percent expansion. Purchases of new equipment rose at an 11 percent rate, slightly revised from 10.7%.

In a separate report the BEA said that personal income grew a 0.4 percent in November as expected and personal spending rose 0.6 percent, better than the 0.4 percent forecast.  

The Personal Consumption Expenditures (PCE) price index fell 0.2 percent on the month and was just 1.2 percent higher over the year, both as predicted. 

The core PCE index, the inflation measure favored and tracked by the Federal Reserve, was flat on the month, down from 0.2 percent in October and under the 0.1 percent forecast. Annual inflation came in a 1.4 percent in November, less than the 1.5 percent prediction and the prior month was revised lower to 1.5 percent form 1.6 percent. The core PCE price index has not been at the Fed's 2 percent target since April 2012.

Durable goods orders from the Census Bureau were also much weaker than predicated in November arriving at -0.7 percent on a forecast for 3 percent, with the prior month revised from 0.4 percent to 0.3 percent. The ex-transport number was measured at -0.4 percent, well below the 1 percent estimate and the downwardly adjusted - 1 percent October result. 

Capital goods non-defense ex-aircraft, a well used proxy for business investment, was flat in November, far weaker than the 1 percent prediction and the October figure was  revised markedly lower to -1.9 percent from -1.3 percent. 

Based on these and othe recent statistics many economists expect economic grwoth to slow to 3 percent to 3.5 percent  in the fourth quarter. 

New home sales lost 1.6 percent in November to a 438,000 annual rate, less than the 460,000 consensus estimate according to the Census Bureau.  The October rate was revised lower to 445,000 from 458,000, from a gain of 0.7 percent to a loss of 2.2 percent. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

gdp dec 23

durable goods  dec 23

pi  dec 23

ps dec 23

pce core dec 23

 

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