Revised Upward Rise in Real GDP Annual Growth Rate Q3 2016

Real GDP was Revised up to a 3.2% Annual Growth Rate in Q3

By Brian Wesbury Chief Economist at First Trust Advisors L.P.

Implications: Real GDP was revised higher for the third quarter and the “mix” of growth was better as well, implying faster economic growth ahead. Today’s second reading on Q3 GDP showed real economic growth at a 3.2% annual rate, the fastest pace in two years, versus the original 2.9% report a month ago. The largest upward revision was to consumer spending which grew at a 2.8% annualized pace instead of the original reading of 2.1%. However, as of the third quarter, the Plow Horse trend in real GDP growth remained intact. Real GDP is up 1.6% from a year ago and up at a 1.9% annual rate in the past two years. Economy-wide incomes confirm this trend, with real gross domestic income up at a 2.1% annual rate in the past two years, despite growing at a stellar 5.2% rate in Q3. The spike in income in Q3 was due to a sharp rebound in corporate profits, which grew 6.6% in the quarter and are now up 2.8% from a year ago. The lull in profits over the past year and a half has been an energy story. But as energy prices are well off the lows from earlier this year, we expect higher profits in the quarters to come. Meanwhile, plugging the new profits data into our capitalized profits model suggests US equities remain cheap, not only at today’s interest rates but even using a 10-year Treasury yield in the 3.5% – 4% range. In terms of monetary policy, the Fed should see today’s report as another reason to raise short-term rates. Nominal GDP growth (real growth plus inflation) was revised to 4.6% annual rate in Q3 from a prior estimate of 4.4%. Nominal GDP is up 2.8% in the past year and up at a 3.1% annual rate in the past two years. All of these figures suggest the economy can sustain higher short-term interest rates. Look for the Fed to raise rates in December, with more rate hikes to come in 2017. In other news this morning, the Case-Shiller national home price index increased 0.8% in September and is up 5.5% in the past year. That’s an acceleration from the 4.7% gain in the year ending September 2015. In the past twelve months, home price increases have been led by Seattle and Portland.

These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security