U.S. stocks recouped Wednesday’s losses and them some as the first look at third-quarter GDP topped the consensus estimate and continuing jobless claims fell substantially. The growth number was very much boosted by government stimulus, two aspects of which have now expired, and it is highly likely the drop in continuing unemployment claims was due to exhaustion of benefits rather than job creation, but hey this is the first positive GDP reading we’ve seen in over a year so the market rejoiced.
The broad market was driven by the sectors that led it lower the day before – financials, basic materials, consumer discretionary and energy. Consumer discretionary and energy shares got clocked Wednesday on concerns that consumer activity will wane again, but the GDP report showed spending was strong thanks to clunker cash, so all is suddenly well. Sorry for the sarcasm, but the especially mercurial nature of the market these days is a bit strange you must admit.
Advancers trounced decliners by an 8-to-1 margin and volume was fairly strong as 1.4 billion shares traded on the NYSE Composite – roughly 8% more than the six-month average.
The dollar was abused.
Market Activity for October 29, 2009
Third Quarter GDP
The Commerce Department reported that GDP posted its first positive reading in over a year and thus the “great recession” has ended! That alone is reason to celebrate, and the actual reading offered an even greater celebratory mood as it came in above expectations. However, the party may prove fleeting, which I’ll get to below.
Third-quarter GDP beat expectations of 3.2% growth to post the strongest reading since Q3 2007 of 3.5% at a real annual rate. This ends the longest and most severe recession in the post-WWII era.
The biggest contributor to GDP was the largest component of the figure – personal consumption. PC roared at a 3.4% annual rate, contributing 2.36 percentage points of the 3.5% GDP increase. Without doubt, this figure was fueled by car and home sales as clunker cash, the homebuyers’ tax credit and fed induced rock-bottom interest rates encouraged buying even as households struggle to repair balance sheets.
The next largest contributor was gross private investment, accounting for 1.22 percentage points of the 3.5% GDP gain. The 11.5% jump in private investment was largely driven by a huge 23.4% rise in home building (residential fixed investment, if you want the technical term). This marked the first contribution from housing in 16 quarters. The business side of things was lacking as non residential structures fell 9% (which followed crater-like declines of 17.3% and 43.6% in the prior two quarters, respectively). Equipment and software investment rose just 1.1% (following declines of 4.9% and 36.4% in the previous two quarters, respectively). It would be nice to see this figure driven by business investment, but we knew this wasn’t the case by the data that’s been released.
Inventories contributed to GDP after the record slashing in stockpiles that took place in the previous quarter. The change in inventories added 0.94 percentage point to GDP (this is part of the overall gross private investment figure). However, I’ll note that inventories did not rise – the rebuilding process has yet to take place. They simply declined at a slower pace than the previous quarter (which wasn’t hard to do) and that’s all it takes for this component to contribute*. (If not for the unprecedented, since these records began in 1947, pace of slashing in the previous quarter the decline in inventories in Q3 would be the all-time record).
And then we have the government, which contributed 0.48 percentage points to Q3 GDP as federal spending offset a decline in state and local government spending.
Surprisingly, net exports failed to contribute, subtracting 0.53 percentage points. Thus, the Fed’s crushing of the dollar via their massive easing campaign provided zero benefit.
To summarize, economic growth expanded at a strong pace due to short-term government stimulus that boosted purchases of cars and homes. The car sales, specifically in one month (August), certainly helped fire up the quarter’s consumption reading and also assisted in the inventory figure adding to GDP. The tax credit fueled home sales, which allowed for some homebuilding. However, the hangover effect that will result will be tough to deal with, we have only delayed the repair to household balance sheets that needs to occur as debt levels remain high and the very weak labor market makes this situation especially difficult.
I remain quite concerned that Congress will become desperate as the 2010 elections draw nearer and the jobless rate remains very elevated and growth subdued. One should always be aware of the collective ignorance of Washington and their unshakable ability to cause things to deteriorate as they lurch for more short-term growth. To put this in more erudite terms, it’s what Hayek termed the “pretense of knowledge.” Every time Washington intervenes by attempting to drive the economy in the direction they see fit, stepping in front of the market’s natural job of price discovery and resource allocation (albeit messy and choppy at times), it fails.
The next GDP report should get another bounce from inventories – although the jury is still out as to whether stockpiles will actually rise and the degree to which this component boosts GDP – but after this large pick up in personal consumption, even in the face of huge headwinds, it means that the fourth quarter will likely receive little if any help from the largest component of GDP.
Initial Jobless Claims
The Labor Department reported that initial jobless claims fell 1,000 to 530,000 in the week ended October 24 – economists had expected claims to fall to 525K. The four-week average, which smoothes this volatile data out, fell 6,000 to 526,250.
Continuing claims fell a large 148,000 to 5.797 million and the extended and emergency compensation claims both fell as well. However, with the duration of unemployment at record levels one has to assume that this decline in continuing claims is completely due to benefits expiring.
Have no fear though Washington is riding to the rescue – there’s a bill moving through Congress, the same one that has the homebuyers’ tax credit extension attached to it, that will extend jobless benefits for another 20 weeks. Hooray!
Have a great weekend!
Brent Vondera, Senior Analyst
The broad market was driven by the sectors that led it lower the day before – financials, basic materials, consumer discretionary and energy. Consumer discretionary and energy shares got clocked Wednesday on concerns that consumer activity will wane again, but the GDP report showed spending was strong thanks to clunker cash, so all is suddenly well. Sorry for the sarcasm, but the especially mercurial nature of the market these days is a bit strange you must admit.
Advancers trounced decliners by an 8-to-1 margin and volume was fairly strong as 1.4 billion shares traded on the NYSE Composite – roughly 8% more than the six-month average.
The dollar was abused.
Market Activity for October 29, 2009
Third Quarter GDPThe Commerce Department reported that GDP posted its first positive reading in over a year and thus the “great recession” has ended! That alone is reason to celebrate, and the actual reading offered an even greater celebratory mood as it came in above expectations. However, the party may prove fleeting, which I’ll get to below.
Third-quarter GDP beat expectations of 3.2% growth to post the strongest reading since Q3 2007 of 3.5% at a real annual rate. This ends the longest and most severe recession in the post-WWII era.
The biggest contributor to GDP was the largest component of the figure – personal consumption. PC roared at a 3.4% annual rate, contributing 2.36 percentage points of the 3.5% GDP increase. Without doubt, this figure was fueled by car and home sales as clunker cash, the homebuyers’ tax credit and fed induced rock-bottom interest rates encouraged buying even as households struggle to repair balance sheets.
The next largest contributor was gross private investment, accounting for 1.22 percentage points of the 3.5% GDP gain. The 11.5% jump in private investment was largely driven by a huge 23.4% rise in home building (residential fixed investment, if you want the technical term). This marked the first contribution from housing in 16 quarters. The business side of things was lacking as non residential structures fell 9% (which followed crater-like declines of 17.3% and 43.6% in the prior two quarters, respectively). Equipment and software investment rose just 1.1% (following declines of 4.9% and 36.4% in the previous two quarters, respectively). It would be nice to see this figure driven by business investment, but we knew this wasn’t the case by the data that’s been released.
Inventories contributed to GDP after the record slashing in stockpiles that took place in the previous quarter. The change in inventories added 0.94 percentage point to GDP (this is part of the overall gross private investment figure). However, I’ll note that inventories did not rise – the rebuilding process has yet to take place. They simply declined at a slower pace than the previous quarter (which wasn’t hard to do) and that’s all it takes for this component to contribute*. (If not for the unprecedented, since these records began in 1947, pace of slashing in the previous quarter the decline in inventories in Q3 would be the all-time record).
And then we have the government, which contributed 0.48 percentage points to Q3 GDP as federal spending offset a decline in state and local government spending.
Surprisingly, net exports failed to contribute, subtracting 0.53 percentage points. Thus, the Fed’s crushing of the dollar via their massive easing campaign provided zero benefit.
To summarize, economic growth expanded at a strong pace due to short-term government stimulus that boosted purchases of cars and homes. The car sales, specifically in one month (August), certainly helped fire up the quarter’s consumption reading and also assisted in the inventory figure adding to GDP. The tax credit fueled home sales, which allowed for some homebuilding. However, the hangover effect that will result will be tough to deal with, we have only delayed the repair to household balance sheets that needs to occur as debt levels remain high and the very weak labor market makes this situation especially difficult.
I remain quite concerned that Congress will become desperate as the 2010 elections draw nearer and the jobless rate remains very elevated and growth subdued. One should always be aware of the collective ignorance of Washington and their unshakable ability to cause things to deteriorate as they lurch for more short-term growth. To put this in more erudite terms, it’s what Hayek termed the “pretense of knowledge.” Every time Washington intervenes by attempting to drive the economy in the direction they see fit, stepping in front of the market’s natural job of price discovery and resource allocation (albeit messy and choppy at times), it fails.
The next GDP report should get another bounce from inventories – although the jury is still out as to whether stockpiles will actually rise and the degree to which this component boosts GDP – but after this large pick up in personal consumption, even in the face of huge headwinds, it means that the fourth quarter will likely receive little if any help from the largest component of GDP.
Initial Jobless Claims
The Labor Department reported that initial jobless claims fell 1,000 to 530,000 in the week ended October 24 – economists had expected claims to fall to 525K. The four-week average, which smoothes this volatile data out, fell 6,000 to 526,250.
Continuing claims fell a large 148,000 to 5.797 million and the extended and emergency compensation claims both fell as well. However, with the duration of unemployment at record levels one has to assume that this decline in continuing claims is completely due to benefits expiring.Have no fear though Washington is riding to the rescue – there’s a bill moving through Congress, the same one that has the homebuyers’ tax credit extension attached to it, that will extend jobless benefits for another 20 weeks. Hooray!Have a great weekend!
Brent Vondera, Senior Analyst
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