U.S. Q3 FY16 GDP Growth Rises to Two-year High

GDP advanced an annualized 3.2% in Q3 FY16, up from 1.4% in Q2 FY16

The U.S. gross domestic product (GDP) advanced at an annualized 3.2% in Q3 FY16, up from 1.4% in Q2 FY16 and better than a 2.9% expansion predicted in the advance estimate, marking the highest growth rate in two years. Propelling the GDP growth were a better-than-expected rise in consumer spending and a surge in soybean exports and investments, partially offset by a decline in fixed investment, according to the second estimate released by the U.S. Bureau of Economic Analysis, and as reported by Reuters on November 30th, 2016.

Economic growth was lifted by upward revisions to business investment and home building. Exports grew at their quickest pace since Q4 FY13, driven by a surge in soybean exports after a poor soy harvest in Argentina and Brazil. International trade contributed 0.87% to GDP growth and not 0.83% as reported last month. Other key economic releases on housing to retail sales and manufacturing output suggest that the economy is growing at a healthy pace in Q4 FY16, even as exports appear to be faltering amid a reversal of the boost to growth provided by soybean exports in Q3 FY16.

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The Atlanta Fed is currently forecasting GDP rising at a 3.6% rate in Q4 FY16, supporting market expectations that the Federal Reserve will raise interest rates in December 2016. Economic growth could also be supported in 2017 if President-elect Donald Trump succeeds in implementing a fiscal stimulus plan that includes infrastructure spending and tax cuts.

When measured from the income side (GDI), the economy grew at a 5.2% clip in Q3 FY16 amid a rebound in corporate profits, the fastest pace of increase in gross domestic income in nearly two years and followed a 0.7% expansion in Q2 FY16. The average of GDP and GDI, which economists consider to be a more accurate measure of economic growth and a better predictor of future output, increased at a 4.2% rate in Q3 FY16, the fastest pace in two years. That followed a 1.1% rate of increase in Q2 FY16 and likely exaggerates the economy’s strength.

Consumer spending on the rise

The U.S. Department of Commerce stated that consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.8% rate in Q3 FY16 and not at 2.1% reported in October 2016. That was still a slowdown from Q2 FY16’s 4.3% pace.

In Q3 FY16, spending on non-residential structures, which include oil and gas wells, jumped 10.1%, the fastest pace since Q1 FY14. Non-residential outlays were previously reported to have increased by 5.4%. On the other hand, business spending on equipment fell at a steeper 4.8% rate, instead of the previously reported 2.7% pace of contraction, marking four straight quarters of decline in spending on equipment.

The export growth estimate was little changed at 10.1%, the fastest pace since Q4 FY13, and reflected a surge in soybean exports after a poor soy harvest in Argentina and Brazil. Trade contributed 0.87% to GDP growth and not 0.83% as reported last month. Businesses increased spending to restock after running down inventories in Q2 FY16, but just not as much as previously reported. Businesses accumulated inventories at a $7.6 billion rate in Q2 FY16, almost half of the $12.6 billion pace reported in October 2016. As a result, inventory accumulation contributed 0.49% to GDP growth and not 0.61% reported earlier. Investment in residential construction fell 4.4% instead of the previously reported 6.2%. Government spending and investment added 0.05% to growth and rose at a slower 0.2% against 0.5% predicted earlier.

U.S. home prices hit new peak

Data from Conference Board showed its consumer confidence index surged in November 2016, rising to levels seen before the 2008 recession. Consumers were upbeat about the labor market and current business conditions. Rising house prices are also likely to keep consumption supported. The Standard & Poor’s CoreLogic Case-Shiller national home price index rose 5.5% in the year to September 2016 and is now just above the peak seen in July 2006.

Tight supply and high demand pushed home prices in September 2016 to a new peak across the U.S., with prices surging 5.5% higher than in September 2015, up from the 5.1% annual gain in August 2016, according to the S&P CoreLogic Case-Shiller Index. The index has now surpassed its previous peak of July 2006. The nation’s 20 largest cities reported a 5.1% annual gain, unchanged from August 2016. While 7 of the 20 cities previously reached new post-recession peaks, those that experienced the biggest booms such as Miami, Tampa, Phoenix, and Las Vegas, remained well below their all-time highs.

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Consumer confidence jumps ahead of holiday season

As the economy heads into the key holiday shopping season, the Conference Board reporting that its index of consumer confidence jumped to 107.1 in November 2016 after dropping to an upwardly revised 100.8 in October 2016. The jump in confidence among U.S. consumers reflects an improving labor market and solid growth in consumer spending, with consumers shrugging off uncertainty ahead of the U.S. presidential election.

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Consumers’ assessment of both current and future economic conditions strengthened over the month, with the present situation Index rebounding strongly to 130.3, from 123.1 in October 2016. The expectations index hit 91.7, up from 86.0.

The survey showed that consumers’ expectations for inflation rates 12 months hence dropped to 4.7% from 4.8% in October 2016, and down from 5.0% in September 2016. The Conference Board’s index had risen to 103.5 in September 2016 before dropping in October 2016, keeping pace with the rise in personal spending and retail sales in September. A separate measure of consumer sentiment from the University of Michigan also showed that consumer sentiment rose in November 2016.

The monthly employment report will be released on Friday, December 2nd, 2016, by the Labor Department. With prospects of near full employment and steadily rising inflation, economists predict that these indicators strengthen the case for the Fed to hike interest rates at its December 13-14th, 2016 policy meeting. The U.S. central bank raised its overnight benchmark interest rate in December for the first time in nearly a decade. With a tight labor market lifting wage growth and boosting household sentiment, consumer spending is likely to gain further momentum for the rest of the year and in 2017.

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