Stepping on the Gas in the Fourth Quarter

GDP, which is the largest measure of economic activity, slowed sharply in Q3. But as the fourth quarter gets underway, early reports are suggesting a significant pickup in activity. 

Let’s review several key stats.

  1. As of November 17, the Atlanta Fed’s GDPNow Model, which incorporates economic data as it is released, is tracking growth at a fast-paced 8.2% rate. As of November 18, Moody’s High Frequency Model is tracking at 8.0%. Q3 expanded by 2.0% (U.S. BEA).
  2.  First-time claims for unemployment benefits have fallen nearly 100,000 over the last seven weeks to a pandemic low of 268,000, according to the Dept of Labor. Anything south of 300,000 is low.
  3.  The Institute for Supply Management said its closely followed ISM Services Index hit an all-time high in October, suggesting activity in the broad service sector is strong.
  4.  The Conference Board reported its Leading Index jumped 0.9% in October. It said gains were widespread among its ten components. The index, which is designed to foreshadow short- and medium-term trends, has posted robust gains in seven of the last eight months.
  5.  The U.S. Census Bureau reported retail sales surged 1.7% in October. Some of the increase was due to higher prices. Still, it’s a substantial move.

What’s going on? Thanks to fiscal-stimulus checks, generous unemployment benefits, business loans, paycheck protection loans, and massive intervention by the Federal Reserve, consumers have plenty of cash to spend. It appears to be fueling economic growth.

But the trade-off for super-fast growth has been higher inflation.

Growth may moderate as we move through the quarter, and some of the excess cash may remain in rainy day funds. Maybe fear of higher prices is driving some to accelerate purchases, as they hope to beat potential price hikes. But for now, worries about inflation aren’t slowing spending or the economy.

Have a happy and joyful Thanksgiving holiday!