Last week I wrote about the need to look beyond the headlines in order to have a more informed view on what is or is not going on with the domestic economy. Last Friday, we received the gross domestic product (GDP) figures for 3Q 2012 from Bureau of Economic Analysis, and once again the headline of 2% growth does not reflect what is really going on.
First off, the GDP headline of up 2% for the September quarter compares to 1.3% in the second quarter and 1.65% for the first half of 2012. To the casual observer, today’s data would suggest an improving economy, particularly since the GDP figure was ahead of the 1.8% or so consensus forecast held by most economists. However, when we break the GDP data down we find the upside surprise was due an unexpected increase in government spending and defense spending in particular. This marked the first increase in government spending in the last 9 quarters.
Much like last week’s durable orders data for September, once we strip out the upside surprise in government/defense spending, the September quarter GDP figure was far less robust coming in more like 1.3% or so. Not only is that flat with the final GDP reading for the second quarter, but the internals confirm that business is wary over the number of uncertainties that lie ahead. More specifically, nonresidential fixed investment, a category that includes business spending on structures and equipment, fell 1.3% during the third quarter, compared with a 3.6% gain the prior period. Generally speaking, companies will not invest or hire when faced with uncertainty and looking ahead there are a number of uncertainties ahead including not only the presidential elections and “fiscal cliff,” but also the weakening economic picture in Europe, Obamacare and tax reform.
The underlying data in the 3Q 2012 GDP report and the September durable orders report make for a challenging October Jobs Report on November 2. Keep in mind that the number of new jobs created in September was slower than in August, which was slower than those created in July. Current consensus expectations call for 125,000 non-farm payrolls to be added in October with the unemployment rate ticking up to 7.9% from September’s 7.8%.
Is the economy moving “Forward”….I hardly think so and that’s why we’ve taken a far more conservative stance in my investing newsletter PowerTrend Profits.