The Government said this week that Gross Domestic Product — the broadest measure of economic activity — grew at a 4.1% annual pace in the third quarter. This was an upward revision from the 2.8% pace that was originally reported in November. The government typically reports its GDP figures at least three times for each quarter and this was the final number. Surprising news, especially after economists had largely written off the previous GDP revision for the third quarter because much of the growth came from businesses building up their inventories.
Should we really be surprised? Last week Labor Department reported that 203,000 jobs were added in November. Drilling down another level we can look at overtime job growth as well. Job growth has tended to decline during periods when overtime growth was negative and increase when overtime job growth was positive. Over the last two years overtime growth has been stable growing in the low to mid-single digit range. This month, however, overtime growth made new 30 month high — a positive development for the job market that suggested the improving job numbers and suggests that job growth can continue.
The original third quarter numbers on GDP were explained away by economists saying that it was due to an inventory build. Which would lead one to ask why would companies build inventory? The answer appears to be that businesses knew more about the economy than the economists. That is why they were building their inventories.
Meanwhile, in a rare example of budget bipartisanship after two years of confrontation and acrimony between Democrats and Republicans, a federal budget compromise passed the U.S. House and cleared a key procedural hurdle in the Senate. The vote overcame a Republican filibuster attempt that required 60 votes in the 100-member chamber to proceed on the budget measure. The count was 67-33 with 12 Republicans joining majority Democrats and independents in support of the plan. The budget plan easily passed the House last week on a 332-94 vote. The Senate passed a compromise $1.01 trillion government spending plan that sets federal spending for the 2014 and 2015 fiscal years.
All this bodes well for the economy. As we have said in the past continue to expect the unexpected. I do not know of one single economist ore prognosticator who forecast anything near a GDP number with a 4 in front of it! In fact a Morgan Stanley note on November 11th projected that “Fourth Quarter growth appears to be on a trajectory for growth a bit below 1.5% at this point”. We doubt that.
Surprises will continue to happen so remember it is our job to be ready and accepting of what the economy brings, not to predict it.
The big question for investors is what will this mean for the markets. We will deal with that in our next blog post.
Please feel free to call me with any questions at 310-459-9196.
Beginning in January, the Fed will buy $75 billion in bonds each month – that’s down from the $85 billion it had been buying since September 2012.