LSA Connect

(+/0) The advance GDP figure for the third quarter came in at +2.8%, which dramatically surpassed consensus expectations of +2.0% or so.  However, much of the positive impact (0.8% of that 2.8%) came from larger inventory accumulation coupled with a smaller decline in federal government spending than many expected.  Also, there was a 0.3% contribution from improvement in the trade deficit, strong housing figures and some positive contribution from state/local government spending which has been in turnaround mode and in an encouraging trend relative to federal spending.  In the consumer spending component, higher growth in goods consumption countered weaker services growth. Personal consumption expenditures (‘PCE’) overall rose an annualized +1.5% for the quarter, which was a tick below expectations, and the core PCE number rising +1.4%.  The GDP price index rose an annualized +1.9%, which surpassed forecast by about a half-percent, running a bit higher than other inflation numbers we covered in depth last week.  Of course, the first/advance estimate remains subject to a few further revisions as data is sorted and clarified in coming months.  While the inventory build created some ‘artificial’ growth in the third quarter, there is sometimes some ‘give-back’ of this growth component in following quarters, which makes sense intuitively.  Estimates for the 4^th quarter are running at 1.5-2.0% considering these factors, with 2014 estimates solidly in the 2.5-3.0% range.

(+) The ISM Non-manufacturing survey came in a little better than expected, rising from September’s 54.4 to 55.4 for October—compared to a forecasted 54.0 and roughly near its average over the past twelve months.  Business activity and employment both rose by 3-5 points while new orders declined a few points.  From the included commentary, it didn’t appear that services were impacted hugely from the government shutdown issues during the quarter, but there was some negative feedback from industries like hotels and food services.

(0) Factory orders for both August and September were released jointly, due to the government shutdown.  August orders fell -0.1% for the month, relative to an expected +0.3% gain, while September orders recovered to a +1.7% gain—but falling short of forecast by a tenth of a percent.  In September’s report, manufacturing inventories (focused in durable goods) rose almost a half-percent, which is a faster rate than seen in recent months.

(+) The Fed’s Senior Loan Officer Opinion Survey for the third quarter showed a continuation of looser credit standards for a variety of lending activities, including commercial/industrial business loans as well as commercial real estate.  At the same time, though, a smaller net number of banks reported looser standards than last quarter.  It also appeared that higher mortgage rates put a damper on demand somewhat, and refinancing activity also slowed a bit.

(-) The preliminary Univ. of Michigan consumer sentiment survey fell from October’s 73.2 to 72.0 in November, which underwhelmed the forecasted 74.5 level.  Unsurprisingly, consumer assessments of current conditions dropped a few points, while future expectations were largely unchanged.  Per the survey administrators, much of the current pessimism is government policy-related, which has been the story for much of the past year (and several years) with these surveys.  Month-to-month, the level of frustration seems to wax and wane with media noise, however.  Inflation expectations for the 1- and 5-year look-ahead periods ticked up a tenth of a percent but hovered around the long-term average of 3%.

(0) Initial jobless claims for the Nov. 2 week fell to 336k from the previous week’s 345k (revised up), but exceeded expectations by 1k or so.  For the first time in a while, no unusual factors, computer changeovers or processing backlogs were present to convolute the data.  Continuing claims for the Oct. 26 week came in at 2,868k, which was virtually unchanged from the week prior and lower than the 2,875k expected.

Finally, even though it seems we just had one, the October government employment situation report was released.  It was the best one in a while, and seemed to shrug off fears of shutdown carryover.  The nonfarm payrolls component featured a gain of +204k jobs, which almost doubled the consensus estimate of +120k (however, we don’t have to remind you about the monthly error factor of +/- 100k jobs embedded in this survey data, in addition to the usual later revisions).  Leisure/hospitality and professional services were the leading categories, with additions of +53k and +44k, respectively.  Government employment declined by -12k, but that was in keeping with trend (think sequestration effects as opposed to temporary shutdown).  Additionally, August and September total payrolls were revised upward by 60k, which added some credibility to the strength of job growth.

The unemployment rate came in line with expectations at 7.3%.  However, again, there was underlying weakness with the labor participation rate, which dropped almost a half percent to 62.8%; this was explained largely by the fact that 450k furloughed workers were counted as ‘temporarily laid off,’ so this is really an anomaly.  At the same time, there have been continual concerns about the size of the labor pool from a demographic and structural standpoint that we have often discussed.  Household employment declined by 735k for the month.

In some of the other peripheral data, average weekly hours fell a tenth to 34.4, which could be related to private sector effects of the shutdown (the shutdown effect doesn’t seem to be excessive, but byproducts are passed on elsewhere).  Otherwise, average hourly earnings rose +0.1% for the month (half the increase forecast), bringing the year-over-year earnings change to +2.2%.  Personal income for September rose +0.5% on the month, which surpassed forecasts by a few tenths and were broad-based in nature.  The PCE and core PCE price indexes rose +0.1% for Sept., which were in line with forecast—these expenditure inflation measures remain in general agreement with CPI and others—and the savings rate rose to 4.9%, which is the highest level so far this year