US Growth Surges, GDP Price Index Plunges, Consumer Spending Jumps, Chicago PMI Falls, Construction Rises

- Advance 3Q GDP rose 3.9% versus estimates of a 3.1% gain and a 3.8% increase in 2Q.

- Advance 3Q Personal Consumption rose 3.0% versus estimates of a 3.2% gain and a 1.4% increase in 2Q.

- Advance 3Q GDP Price Index rose .8% versus estimates of a 2.0% gain and a 2.6% increase in 2Q.

- Advance 3Q Core PCE rose 1.8% versus estimates of a 1.5% gain and a 1.4% increase in 2Q.

- 3Q Employment Cost Index rose .8% versus estimates of a .9% gain and a .9% increase in 2Q.

- Chicago Purchasing Manager for October fell to 49.7 versus estimates of 53.0 and a reading of 54.2 in September.

- Construction Spending for September rose .3% versus estimates of a .5% decline and a downwardly revised .2% decline in August.

BOTTOM LINE: Economic growth in the US unexpectedly accelerated in the third quarter, despite the housing and credit market turmoil, as increases in exports, consumer spending and business investment more than made up for a drop in home construction, Bloomberg reported. GDP grew at an annual rate of 3.9%, the most since the first quarter of 2006 and well above the long-term average of 3.1%. The catalysts for this strong showing were a sharp bounceback in consumer spending and decelerating inflation. Employment costs, which make up two-thirds of inflation, rose at a slower pace than during 2Q. The Core PCE, the Fed’s favorite inflation gauge, rose 1.8% which is within the Fed’s stated comfort zone of 1-2%. Moreover, the rate of growth in the GDP Price Index is plunging. The GDP Price Index rose .8% during 3Q versus 4.2% during 1Q, despite some significant rises in commodity prices. This is the lowest rate of growth in prices since the second quarter of 1998. I continue to believe the secular trend of disinflation remains firmly in tact and that Asia will experience another bout of deflation during the next substantial global growth slowdown. According to Intrade.com, the odds that U.S. growth turns negative this quarter are only 12.5%. Moreover, economists are estimating growth of 1.8% this quarter. I expect growth to come in between 2% to 2.5%, boosted by inventory rebuilding and strong exports. I also still think U.S. growth of around 2% to 2.5% is likely over the intermediate term as a booming global economy continues to more than offset the substantial drag from housing.

Chicago-area business activity in October fell below estimates, as manufacturers restrained production, Bloomberg reported. It was the seventh time since the economic expansion began in November 2001 that the index fell below 50. The New Orders component of the index fell to 53.9 from 56.2 the prior month. The Prices Paid component rose to 74.7 versus 59 the prior month. The Employment component fell to 49.5 versus 52 the prior month. I expect this gauge to bounce back next month as companies rebuild depleted inventories and companies gain confidence in the sustainability of the current expansion.

Spending on US construction projects unexpectedly rose last month as gains in the building of factories, hotels and schools offset a drop in home construction, Bloomberg reported. Non-residential construction rose 17% year-over-year during the month. I continue to believe construction activity will remain muted over the intermediate-term as homebuilders pare down inventories.