Thursday, November 7th, 2013 @ 9:20PM

Between the Lines
by Gary D. Halbert

The first report on 3Q GDP came out this morning, and it was decidedly better than expected. The “advance” report from the government on 3Q GDP estimates that the economy grew by 2.8% (annual rate) last quarter, up from 2.5% in the 2Q. That was well above the pre-report consensus of only 1.9%-2.0%.

The Commerce Department said that growth in the 3Q primarily reflected positive contributions from consumer spending, private inventory expansion, investment, exports, residential and nonresidential fixed investment and state and local government spending. These positive developments were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

If you drill down into today’s GDP numbers, the latest report is not as positive as the headline number of 2.8% would lead us to believe. For example, real personal consumption expenditures (consumer spending) increased only 1.5% in the 3Q, compared with an increase of 1.8% in the 2Q. Since consumer spending accounts for over 70% of GDP, this is a little disappointing.

Likewise, the increase in business inventories in the 3Q suggests that they will produce less in the current quarter. Today’s report also noted that businesses reduced their equipment purchases last quarter. And as noted above, federal spending fell in the 3Q. These are disappointing indicators, which might lead to a downward revision to today’s GDP report in the next estimate on December 5.

But let’s be clear: the mainstream media do not drill down into the numbers. And already this morning, they are heralding the latest GDP report as a sure sign that the economy is finally getting some real traction. In essence, today’s media narrative is that: 1) the advance report came in significantly above the consensus; and 2) GDP growth of 3% or better must be just around the corner.

Or even better, maybe the 3Q GDP number of 2.8% will be revised upward to 3% in the next estimate on December 5. That would be the best of all worlds for the mainstream media. Make no mistake, if the government reports a 3% GDP number, the media will proclaim that all is well and that the economy is finally back to “normal.”

The bottom line is that today’s 2.8% GDP headline print was better than expected, and that is a good thing. But the internals of the report were somewhat disappointing on balance. Nevertheless, the media is heralding the report as a sign that the struggling economy is on the mend. We’ll see when the next revision comes early next month.

Not surprisingly, the US stock markets reacted negatively to this morning’s stronger than expected GDP report. That’s the way it goes these days. Good economic news is bad for the market because it might lead the Fed to “taper” its QE purchases. Bad news, on the other hand, is usually good for the markets as it suggests the Fed will keep the pedal to the metal.

The other economic report out this morning was ”initial claims” for state unemployment benefits for last week from the Labor Department. The DOL reported that initial claims were 336,000 last week, about in-line with expectations, and down slightly from a revised 340,000 the week before.

Two other reports out in the last week are worth noting. The ISM manufacturing index for October came in at a strong 56.4 last Friday and beat expectations. Any number above 50 indicates that the economy is expanding.  Today’s ISM services index was also better than expected at 55.4, up from 54.4 in September.

In the big picture, today’s GDP report (if it holds) suggests that the economy is improving at least modestly. Yet consumer confidence remains very weak. The public is not happy with the latest Obamacare revelations, is very concerned that some 15 million Americans are seeing their insurance policies canceled, and now understands that our president blatantly lied to us about keeping our healthcare plans.

What Americans are slowly coming to understand is that this was all part of the plan all along.  It is now clear that Obama’s healthcare planners purposely set the requirements so high that it would cause most of the 15 million individual health plans to be canceled, and these Americans would have no other option than Obamacare.

And it will only get worse when the “employer mandate” kicks in next year, which will affect the other 80% of us who get our health insurance at work. The country is in a funk, and I don’t expect it to improve significantly anytime soon.

Posted by AIA Research & Editorial Staff
Categories: Between the Lines