GDP: Q3 Initial Reading Stronger on Better Business Investment

Bottom Line: A surprise jump in inventory investment helped the advance estimate of 3rd Quarter GDP rise more than expected, up 3% annualized on the quarter versus expectations for 2.6%. Consumption fell, mostly as expected, while net exports added modestly more than expected. While the BEA provided notes on how the hurricanes may have impacted their figures, there was no specific guidance. Certainly some of the inventory build and even some of the decline in imports could be related to the weather disruptions. Finally looking at longer-term trends, the economy has been growing for the past 28 quarters at an average annualized growth rate of 2.6%, suggesting economic growth remains modest with real final sales growing at a 2.2% annualized rate over the last 4 quarters. There's nothing to suggest this better than expected report represents a shift upward in trend. Gross Domestic Product ROSE by 3.0% in the 3rd Quarter, higher than market expectations for an increase of 2.6%. During the 7.0 years of economic expansion, the economy grew at an average annual rate of 2.6% after declining at a 2.9% rate during the recession. Economic activity is now 2.3% ABOVE its year ago level and 14.4% ABOVE its pre-recession 2007 Q4 cyclical peak. Inventory Investment ROSE by $30.3 billion, adding 0.73 percentage points to overall economic activity. Consequently, Real Final Sales ROSE by 2.3% and is now 2.2% ABOVE its year ago level. Additionally, Imports FELL by 0.8% and Exports ROSE by 2.3% so Net Exports ROSE by $18.1 billion. This implies that Real Final Domestic Demand ROSE by 1.8% and is now 2.3% ABOVE its year ago level. Consumer Spending ROSE by 2.4%, contributing 1.62 percentage points to economic growth. Business Investment ROSE by 3.9%, adding 0.49 percentage points to GDP. Intellectual property products increased by 4.3% while non-residential structures declined by 5.2%. Residential Investment FELL by 6.0%, subtracting 0.24 percentage points to economic growth. Finally, Government Purchases FELL by 0.1%, subtracting 0.02 percentage points to GDP. This was its 5th negative contribution in the last 12 quarters. The GDP Price Index ROSE by 2.2%, compared with market expectations of 1.7%. This is also 1.8% ABOVE its year ago level.