Location: Toronto
Author: RBC Financial Group Economics Department
Date: Friday, October 30, 2009
The first, or advance, estimate of third-quarter GDP indicated that the economy rose a robust 3.5% at an annual rate. This was slightly above market expectations of a 3.2% increase and represented the first increase in five quarters, including a 6.4% drop in the first quarter and a 0.7% decline in the second.
The report encouragingly showed stronger-than-expected spending in a number of key expenditure areas that was tempered by a slightly more aggressive drawdown in inventories. For example, consumer spending rose a very strong 3.4% following a 0.9% drop in the second quarter. The increase was largely powered ahead the 22.3% rise in durables consumption in the quarter reflecting the impact of the cash-for-clunker rebates. The increase in this component added 1.5 percentage points to the overall quarterly increase in GDP. Gains in non-durable and services consumption were up by a much more modest 2% and 1.2%, respectively.
Also showing greater-than-expected strength was the 23.4% surge in residential investment. This brought to an endto 14 consecutive quarters of decline in this expenditure area. Investment in equipment and software rose by a relatively modest 1.1%, although this followed six quarters of decline. Inventories were reduced by a sizeable US$130.8B (in chained 2005 dollars), which represented some easing from a US$160.2B drawdown in the second quarter.
Annualized growth in the core PCE deflator, the key inflation measure in the GDP report, moderated as expected to 1.4% from 2% in the second quarter.
The return to positive GDP growth after four quarters of decline is encouraging. As well, the strength reflected the return to positive growth by a number of key expenditure areas with inventories continuing to be drawn down. The lower level of inventories implies that there will be a greater need for production going forward as demand continues to trend higher.
However, much of the strength in third-quarter consumer spending reflected the impact of the cash-for-clunker rebates, which sent motor vehicle sales significantly higher. With those rebates ending in September, the Fed is expected to keep monetary conditions very accommodative to help sustain demand. The absence of upward inflation pressures in today’s report provides further justification for the Fed funds rate to remain very low between 0.0% to 0.25%. Our forecast assumes that the Fed funds rate will not be raised until the fourth quarter of next year.
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