3Q22 GDP: It’s the Big Little Things
The debates over recessions sometimes focus too much on the headline GDP and not the underlying GDP line items.
I take a quick look at the 3Q22 GDP lines items as the idea of a +2.6% GDP growth number somehow changes the drift of the micro forces at work from the line items below. The basic trend lines are still going as most expect. I’ve already looked at some of these recession debate items in an earlier commentary (see Unemployment, Recessions and the Potter Stewart Rule), and it is a murky drill to frame recession signals. When the GDP release comes out, I usually do a quick run-through the PCE lines and Fixed Investment lines for the first round of variances and then glance at the “distorters” such as Net Exports and the Private Inventory line.
The 2.6% number today is like the -1.6% of 1Q22 since it comes with some asterisks in the mix of lines. That -1.6% headline for 1Q22 came with a -3.1% negative in “Net Exports of goods and services” for a line that exceeded the headline number. The +2.6% GDP today came with a +2.8% Net exports number. The relative scale of headline vs. a single line item offers a reminder that growth rates this low have been seen across the Obama, Trump, and now Biden years. 2021 was an anomaly on the COVID rebound. These low growth rates can be swayed materially by one or two swings in items such as Net Exports and Private Inventory levels.
Personal Consumption Expenditures (PCE): The good news is that PCE stayed positive at +1.4%, but the Goods line stayed negative at -1.2%. That was better than the -2.6% for Goods in 2Q22, but the Goods line saw the third negative in a row and negative for 4 of the last 5 quarters. The Durable Goods line was also negative at -0.8% after a -2.8% 2Q22. Services is hanging in well enough with the swing from Goods to Services seen since COVID eased up, but the +2.8% in 3Q22 marked a sequential fade from +4.6% in 2Q22. PCE is always the anchor at more than 2/3 of GDP. In theory, PCE should hold up at 50-year lows in unemployment. The signs of jobs anxiety and real wage declines net of CPI will get tested on this PCE line.
Gross Private Domestic Investment (GPDI): GPDI is staying materially negative at -8.5% in 3Q22 after -14.1% in 2Q22. The GPDI mix is where I look quickly for any fallout from capex planning in the private sector and how the Residential investment line is showing the effects of the spike in mortgages. The numbers show a rapid rollback in the Nonresidential Structures line at -15.3% and negative for the sixth quarter in row after a double-digit decline in 2Q22 (-12.7%). Residential got hammered at an unsightly -26.4% in 3Q22 after -17.8% in 2Q22. That is six straight negative quarters. That Residential number by itself shaved -1.37% off headline GDP. On a positive note, Equipment posted +10.8%. As usual, IP investment hung in well enough at +6.9%. I looked at homebuilding in an earlier comment today (see Market Menagerie: Housing Questions to Ponder).
Change in inventories: The private inventory line shaved -0.7% off the headline GDP after a -1.91% haircut in 2Q22. The inventory line always comes with the qualifier of needing to consider the industry level to frame WHY the inventory is lower. Is it about inventory liquidation in expectation of lower sales? Or is it about supplier chain challenges and higher demand driving lower levels? That is a digging expedition at the primary subsector level. A retailer inventory swing could be a negative factor for some liquidation needs while some manufacturing groups might have a positive reason for tight inventories as the supplier to OEM chain scrambles to catch up. The equipment line in GPDI was reassuring for manufacturing just as capacity utilization metrics were supportive (see Capacity Utilization: No Recession Numbers Yet). The market has seen some news flow around tonnage trends in freight and logistics (see Market Menagerie: Freight and Logistics).
Net Exports of Goods and Services: As noted above, the Net Export line in GDP generated a +2.77% contribution to the headline GDP line that totaled 2.6%. Like with inventory liquidation, the question is about the moving parts. The fact that imports declined could reflect weak conditions in some industries in the US (demand for supplies) or supply chain limits. In other words, a positive contribution to GDP could in part be tied to some bad news. The ironic twist is that when US demand is strong and growth is bullish, the US is ordering more inputs from low-cost offshore suppliers. We might wish a lot of those imports were produced here, and reshoring and onshoring in a growing focus. In the meantime, the supplier chain is located where it is. Period. As we have seen, the biggest trade deficits often occur when the US is doing well. It is a function of US demand and where the sources of supply are located (often China or Mexico). This net line will need some layers pulled back as this cyclical swing unfolds into 2023.
The GDP headline number was good, and everybody loves a good headline. The line items were more mixed. For PR purposes in policy discussions two weeks before an election, it beats a negative headline number like the last two quarters of 2022.