Third Quarter GDP 3.5%, Much Weaker Than it Looks: Inventory Adjustment 2.07%

GDPNow nailed the first estimate of third-quarter GDP. The BEA reports 3.5% with inventories accounting for 2.07 points.

The BEA reports the Gross Domestic Product, 3rd quarter 2018 (advance estimate) is 3.5%.

The headline number looks pretty good, but it isn't. Change in Private Inventories accounted for 2.07 percentage points of the gain.

Inventories net to zero over time. That inventory accumulation makes sense only if sales match. Rather, I suspect we had an accumulation of goods related to Trump tariffs, and secondarily we have business optimism that is unwarranted.

Contributions to Change in GDP

In addition to the huge 2.07 CIPI (line 40), note that government consumption (line 50) added 0.56 percentage points.

A little bit of election spending perhaps? Of Course. Compare to 2017.

Also note residential fixed investment (line 39). Are we really to believe that with the housing slowdown for six month that the result is only -0.16 percentage points.

Net exports (line 43) took away a whopping 1.78 percentage points, with imports rising and exports shrinking. This we call "winning the trade war".

Note that imports don't really subtract. Rather they reflect spending that never happened in some of the other numbers.

CIPI alone is enough to make this report look better than it really was. And no to that you can add residential housing and government spending.

Check out the plane orders in Durable Goods Mirage: Good Headline Number, Very Poor Details. New orders +0.8%, Excluding Defense -0.6%.

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Mike "Mish" Shedlock

No. 1-1

Expect 2% going forward, or less, if the Tariff war heats up some more.