United States Gross Domestic Product & Corporate Profits: ‘ A solis ortu usque ad occasum’.

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+ US GDP Annualized Q/Q (Q3F) +3.2% vs. +3.3% expected, previous period +3.3%

+ Personal Consumption +2.4% vs. +2.5% expected, previous period +2.5%

+GDP Price Index +2.1% vs. +2.1% expected, previous period +2.1%

+Core PCE+1.3% vs. +1.4%expected, previous +1.4%

Takeaways

–> Real GDP growth was reported down one-tenth of one percent to +3.2% (Q/Q) in Q3 2017. We can deduce from the revision downward that consumption growth slowed in the third quarter, it was reported at +2.2% vs. the expected +2.3% that was reported previously.

Moreover, net trade’s contribution to the Real GDP was lower, as well, reported at +0.36pp from +0.43pp in the previous period. From net trade, we can read through to underlying US demand which was also amended lower to -0.1pp to +1.9pp.

Howbeit, on the brighter side state and local output, helped adjust growth in government spending higher by three-tenths of one percent to +0.7%

 

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Gross Domestic Product (GDP)

Market Sensitivity: Medium to high.

What Is It: The foremost report on America’s economic health, GDP measures how fast or slowly the economy is growing.

Most Current News Release on the Internet:www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Home Web Address: www.bea.gov/

Release Time: 8:30 a.m. (ET); advance estimates are released the final week of January, April, July, and October. Two rounds of revisions follow, each a month apart.

Frequency: Quarterly.

Source: Bureau of Economic Analysis, Commerce Department.

Revisions: Monthly revisions tend to be moderate, though they can on occasion be more substantial. ”

Bernard Baumohl. The Secrets of Economic Indicators

 

Market Impact
The GDP report lags behind many more-current monthly indicators, and its release can become a nonevent. However, you have to be careful here! Despite its dated appearance, the GDP report must not be ignored. For one, it could contain some genuine surprises. The growth rate can turn out to be hugely different from what the market expected. Second, it’s essential reading for anyone who wants to identify sources of strength and weakness in the economy. Third, a close read of the GDP report can provide some hints on where the economy and corporate profits might be headed in the coming quarters. Fourth, the revisions might be large enough to completely alter your outlook on the economy and call for a new investment strategy. Finally, if the inflation statistics in this report remain stubbornly outside the Fed’s comfort zone, you can expect a change in interest-rate policy fairly quickly. For these reasons you should never take the GDP release for granted.

Bonds

When the actual GDP data is released, the first question on everyone’s mind is how it compares with expectations. If the economy is growing at or below the pace projected by economists, the bond market is likely to react positively, especially if real final sales are anemic and unwanted inventories are ballooning.
Conversely, if GDP growth numbers exceed expectations and the inflation indexes are showing signs of accelerating, it could be a nightmare for bondholders. A strong GDP report combined with rising inflation pressures will spread fears that the Federal Reserve will sooner or later intervene and raise short-term rates to cool down the economy. Unless investors are confident that the Fed can nip inflation in the bud, chances are that bond prices will plummet and cause yields to spike.

Stocks

The equity market’s reaction to the GDP report will likely be less reflexive than the bond market’s. Here the central question is how the latest release affects the outlook for corporate profits. A healthy economy generates more business earnings, while a sluggish business environment depresses sales and income. However, there’s an important qualification here. If economic activity has been racing ahead of the 3.5% rate for several quarters, even shareholders start to get nervous about rising prices. Higher inflation will cause an erosion of household purchasing power and probably will force interest rates higher. Thus, the equity market can be as uncomfortable with an economy growing too quickly as it is when it moves too slowly.

Dollar

To foreign investors, a strong American economy is viewed more favorably than a weak one. Robust economic activity in the U.S. spurs corporate profits and firms up interest rates. Thus, foreign investors see opportunities to make money in the stock market and from higher-yielding treasury bills and bonds. All this increases the demand for dollars. If the Federal Reserve moves quickly to preempt inflation by driving up short-term rates, odds are this would also lead to an appreciation of the dollar because of the perception that the U.S. central bank is ahead of the curve in containing price pressures.
However, if inflation accelerates and stays at a high level, it would lower U.S. competitiveness in the world and worsen the country’s foreign trade deficit, a scenario that can make U.S. currency far less appealing.

quote-economic-growth-without-social-progress-lets-the-great-majority-of-people-remain-in-poverty-while-john-f-kennedy-345799

-R.W.N II

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