Growth Slows, Inflation Subsides, Consumption Strong, Confidence Rising

- Advance 3Q GDP rose 1.6% versus estimates of a 2.0% increase and a 2.6% gain in 2Q.
- Advance 3Q GDP Price Index rose 1.8% versus estimates of a 2.8% increase and a 3.3% gain in 2Q.
- Advance 3Q Personal Consumption rose 3.1% versus estimates of a 3.1% increase and a 2.6% gain in 2Q.
- Advance 3Q Core PCE rose 2.3% versus estimates of a 2.5% increase and a 2.7% gain in 2Q.
- Final Univ. of Mich. Consumer Confidence for October rose to 93.6 versus estimates of 92.7 and a prior reading of 92.3

BOTTOM LINE: The US economy grew less than economists forecast last quarter, Bloomberg reported. A 17.4% decline in residential housing construction was the main reason for the slower growth. Also hampering growth, companies added less to inventories during the quarter. There were several signs the slowdown may prove temporary. Consumer spending, which accounts for about 70% of the economy, increased 3.1% versus a 2.6% gain in the second quarter as rising incomes and lower energy prices helped offset the effects of the housing slowdown. The price of gas this month has averaged $2.25/gallon versus $3.00/gallon during July. Business spending on new equipment and software surged 6.4% during the quarter versus a 4.4% increase in the second quarter. The Core PCE Index, the Fed’s favorite inflation gauge, rose 2.3% during the quarter versus a 2.7% gain the prior quarter. The GDP Price Index rose 1.8% versus a 3.3% gain in the prior quarter. I expect US GDP Growth to bounce back to around 3% this quarter, while inflation continues to moderate.

Consumer Confidence in the US rose to the highest in 15 months in October as plunging gas prices, a strong job market and rising stock prices left more money in Americans’ pockets, Bloomberg reported. The current conditions component of the index, which reflects consumers attitude about their current financial situation and whether it’s a good time to buy big-ticket items, soared to 107.3 from 96.6 the prior month. Workers’ average hourly earnings rose 4% over the last 12 months, the largest gain in five years and unemployment is at a historically low 4.6%. I continue to believe consumer confidence will reach new cycle highs over the coming months as the job market remains healthy, housing stabilizes, interest rates remain low, inflation decelerates further, stocks continue to rise, irrational pessimism lifts and the mid-term election ends.