Q3 GDP Growth: Thank You, Soybeans?
After quarters of 1% growth, we finally got the news we were hoping for.
The kick in the pants that would goose the markets, and the perception all is well.
The U.S. government reported that GDP expanded at a 2.9% annual pace in the third quarter of 2016 – a nice jump from the first half of the year when we grew by 1%.
It was also well ahead of consensus estimate for 2.5%.
But before you cheer the “great” news that comes just days ahead of elections, know this.
The consumer and your average business didn’t contribute much to the number. Instead, most of the gain you’re seeing is because of a soybean.
Let me explain.
First, personal consumption – a key driver of growth – slowed to a rate of 2.1% from 4.3% in the second quarter. It was also worse than estimates for 2.6%.
In short, consumer spending grew at half the pace of the prior quarter. Part of the reason for that is a squeeze on consumer budgets, given higher gas and healthcare costs.
In fact, according to McDonald’s latest earnings report, the company notes:
“There are broader macroeconomic issues of consumer confidence and just uncertainty of wage increases, the slight squeeze on discretionary spend with gas prices aging back up and healthcare costs going back up. So, I think those are sort of things that we see affecting customers and basically the spare cash they have in their pocket.”
Meanwhile, business spending on equipment fell 2.7%, dropping for the fourth straight quarter, forcing companies like Caterpillar (CAT) to report a 49% drop in third quarter profitability and lower its full-year outlook for the second time this year.
That’s not good because it’s an indication that businesses are not confident about economic growth – a big headwind for the Federal Reserve.
Instead, most of the growth in third quarter GDP was a direct result of a 10% jump in exports, helped by a temporary boom in the shipments of U.S. soybeans after a bad harvest in South America.
Soybeans may have been responsible for at least a third of GDP growth.
The soybean accounted for 0.9% of growth in the world’s largest economy, which is terrible news because it’s a temporary jump. It has not implications for future growth.
Without the consumer or business spending, the report is not as great as we would like.