US: Q3 real GDP increases at a solid pace - Nomura

In respect to US GDP, analysts at Nomura explained that momentum will likely continue into Q4. 

Key Quotes:

"Q3 real GDP came in at 3.0% q-o-q saar, in line with our forecast but above market expectations (Nomura: 2.9%, Consensus: 2.6%), pointing to an economy growing above potential. 

There were few weak spots in this report besides areas that may have been weighed down by the recent hurricanes. Personal consumption expenditure (PCE) rose solidly by 2.4%, matching our forecast, and added 1.62pp to real GDP growth. This appears consistent with the healthy pace of job creation and low unemployment in the economy. Much of the growth in PCE was driven by consumer spending on durable goods. In particular, spending on autos and auto parts rebounded and contributed a decent 0.51pp to PCE growth, likely reflecting a pick-up in replacement demand in the aftermath of the hurricanes. 

Business equipment investment rose strongly by 8.6%, in line with incoming data. Industrial production data point to a steady expansion in activity despite some transitory slowdown due to inclement weather. Shipments and new orders of core capital goods have been on the rise. We expect this elevated momentum to persist in the near term and have recently raised our outlook. Moreover, inventory investment contributed solidly to growth, adding 0.73pp. Although hurricanes tend to depress growth in inventories, inventory accumulation in Q3 has been resilient. The inventory-sales ratio came down in recent quarters from an elevated level, creating room for intentional stock-piling. Real net exports came in broadly in line with our expectations, adding 0.41pp to growth. Real exports increased solidly by 2.3%. 

Exports of goods increased a decent 1.4%. There was also a sizable contribution from services exports. By contrast, investment in nonresidential structures was weak, down 5.2%. Some of the decline can be attributed to the negative impact from the recent hurricanes. However, with tighter lending standards on commercial real estate loans, investment in commercial structures has been weak since early 2017. Reflecting recent plateauing in drilling activity, investment in related structures increased at a more subdued pace compared to strong increases in Q1 and Q2. Residential investment was soft with much of the weakness from the multifamily housing sector, reflecting the oversupply of apartments. Inflation data were in line with our expectation. 

Q3 core PCE deflator rose an annualized 1.317% q-o-q, which compares with our forecast of 1.312%. We maintain our current forecasts for the monthly profile of PCE deflators, scheduled for release on 30 October. We expect a 0.141% m-o-m (equivalent to 1.33% y-o-y) increase in the core PCE deflator in September. Today's GDP number is one more data point that shows that the US economy has been outperforming expectations after several years of underperforming. For example, from mid-2015 until recently, GDP growth on a y-o-y basis consistently came in below expectations by an average of almost 1pp. This year will be different. 

With GDP growth of about 3% in Q2 and Q3, and with our forecast of Q4 growth of around 2.7%, we expect q4/q4 real GDP growth for 2017 to exceed what forecasters thought back at the beginning of 2017: 2.5% q4/q4 versus a median forecast of 2.25% from the beginning of the year according to the Survey of Professional Forecasters. This upside surprise is positive, but it is not very large. A number of factors contributed to the upward surprise, including improved financial conditions, better growth outside the US, depreciation of the US dollar, a cyclical rebound from the bust of the shale oil boom and perhaps increased business and consumer optimism. 

Some of those factors could wane in coming quarters. For example, the boost from increased energy output has been diminishing. Another implication of the recent data is that productivity growth may have picked up modestly from very low levels in 2016. However, it is too early to tell if productivity is turning the corner (and we are skeptical that it will turn significantly in the medium term)."