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Q3 GDP Reaches 3.5% on Big Import Growth

Mark Vickery
3.5% Q3 GDP on the headline was better by 20-30 basis points from analyst consensus, though lower than Q2's unrevised 4.2% growth in the June quarter.

Friday, October 26, 2018

Before we get to another big slab of Q3 earnings data from companies reporting before the bell this Friday, the hotly anticipated first read on Q3 GDP has also been released today: 3.5% Q3 GDP on the headline was better by 20-30 basis points from analyst consensus. This is lower than Q2’s unrevised 4.2% growth in the June quarter, but still represents the best 3-quarter average since 2014.

Consumption led the way, up 4% — lending to the narrative that tax cuts, rising wages, etc. have helped drive growth even three quarters later. This was offset by lower reads on Business Investment, up just 0.8%; Structures were down and Equipment only rose 0.4%. We also see lower Housing investment, -4%, which matched the -4% we saw in quarterly Exports. So while the headline looks nice and strong, we do see some dents in the armor when we look a little closer.

Another boost to GDP in Q3 came from Government (mostly Defense) spending, up more than half a percentage point. This sort of upside has a way of burning off once spending needs have been met. But the biggest upswing that may prove detrimental to future quarterly growth is Imports, which rose 9.1% in Q3. The reason for this is because there is clear motive for trade deals to be brought forward in order to avoid the heavy tariffs forthcoming in the ongoing trade war, mostly between the U.S. and China. Thus, some of the Import growth we saw from this quarter may dry up noticeably in Q4 and beyond, which might lead to lower GDP in those quarters.

Where there might be a silver lining even in this cautious outlook is that it may begin to have an effect on how the Fed determines interest rates going forward. Currently, another quarter-point rate hike is very likely to occur during the group’s December meeting, but if a slowdown looks to be in the works — and the forward-indicating stock market rolling back all 2018 profits to this point is apparently considering this possibility — then perhaps the Fed waits to make its next interest rate hike. We’re still several weeks away from that decision.

For a quick wrap-up on morning earnings reports, Colgate-Palmolive CL met earnings estimates and is trading down 5% in today’s pre-market (where indexes are again in the red after a strong showing yesterday); Phillips 66 PSX posted big beats on both top and bottom lines, moving shares up 2.5% at this hour; and lumber giant Weyerhauser WY missed earnings estimates by 28% ahead of the bell today, with shares dropping 3.7% in early trading.

For more on CL’s Earnings, click here.
For more on PSX’s Earnings, click here.
For more on WY’s Earnings, click here.

Mark Vickery
Senior Editor

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