Economic Growth and the Labor Market Continue to Steam Ahead
- The first estimate by the Bureau of Economic Analysis showed real GDP growing at a 1.9 percent annualized rate in the third quarter, only one-tenth slower than the second quarter’s pace. Real personal consumption expenditures (PCE) and government spending were the largest contributors to growth, followed by residential fixed investment growth, which turned positive for the first time in seven quarters. Business fixed investment was the biggest drag on growth, declining at the largest annualized rate since the end of 2015. Investment in structures was particularly weak, posting the second consecutive quarter of double-digit decline. While net exports and business inventories both dragged on growth, they were less negative than we had expected.
- Nonfarm payrolls increased by 128,000 in October, a relatively strong number especially since it included significant but temporary job losses from the recently resolved GM/UAW strike, as well as layoffs of temporary Census workers. In addition, job gains for the prior two months were revised upward by a total of 95,000. The average workweek held steady, and average hourly earnings growth was unchanged at 3.0 percent year over year, which should offset concerns of weakening personal income growth. The unemployment rate remains at historically low levels, with a slight uptick reflecting an increase in the labor force participation rate as workers continue to return from the sidelines.
- At its October meeting the Federal Open Market Committee (FOMC) lowered the federal funds rate target by 25 basis points to a range of 1.50 percent to 1.75 percent, as we expected. The FOMC’s statement and later Chairman Powell’s comments during the post-meeting press conference suggested that this cycle of rate cuts may have run its course, with any further cuts dependent on incoming data regarding macroeconomic conditions and inflation expectations.
- Annual growth in headline PCE inflation decelerated in September to 1.3 percent, the slowest pace in seven months. Core inflation, excluding food and energy prices, also slowed to 1.7 percent. Both core and headline inflation remain well below the Fed’s “symmetric” 2.0 percent target.
The preliminary estimate of Q3 GDP growth surprised to the upside, two-tenths higher than our October forecast, in significant part because inventory growth was stronger than we expected. We expect to reduce our forecast of Q4 inventory growth accordingly, and we maintain our view that full-year 2019 growth will come in around 2.2 percent. While the strong October jobs report supports the FOMC’s more muted appetite for future rate cuts, we maintain our expectation that the FOMC will implement one more rate cut in early 2020 based on stubbornly low inflation and persistent potential downside shocks.
Details on Key Takeaways and Other Releases
- Gross domestic product, adjusted for inflation, increased 1.9 percent annualized in Q3 2019, according to the advance estimate from the Bureau of Economic Analysis. Real personal consumption expenditures (PCE) grew 2.9 percent, slowing from 4.6 percent in the prior quarter, and contributed 1.9 percentage points to GDP growth. The other large contributors to growth were government and residential investment, which added 0.4 percentage points and 0.2 percentage points, respectively. Residential investment increased at a 5.1 percent annualized pace. Nonresidential fixed investment dragged on growth, with a 3.0 percent overall decline driven by a 15.3 percent drop in investment in structures; investment in equipment fell 3.8 percent while investment in intellectual property products rose 6.6 percent. Net exports and business inventories each subtracted only one-tenth from headline GDP, less than expected.
- Nonfarm payroll employment expanded by 128,000 in October, according to the Bureau of Labor Statistics. The three-month average gain was 176,000. Job gains from the prior two months were revised upwards by 95,000. The average workweek was unchanged at 34.4 hours. Average hourly earnings were up 0.2 percent over the month and 3.0 percent from a year ago. The unemployment rate ticked up to 3.6 percent as did the labor force participation rate to 63.3 percent.
- Personal income, adjusted for inflation, rose 0.3 percent in September, according to the Bureau of Economic Analysis. Real consumer spending increased 0.2 percent. The saving rate jumped to 8.3 percent, the highest level since March. The PCE deflator was flat over the month but rose 1.3 percent from a year ago. Core PCE increased 1.7 percent annually.
Ricky Goyette and Rebecca Meeker
Economic and Strategic Research Group
November 1, 2019
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