The Commerce Department released their second estimate of third quarter Gross Domestic Product (GDP) last week. The number was revised down to 2 percent from the first estimate of 2.5 percent. The result was weaker than the 2.3 percent economists had expected as average on average.
Digging further into the report, the Commerce Department tagged weaker inventory building by businesses as the main culprit. According to the report, additional data from the private sector showed weaker restocking of inventory than seen in the first estimate.
As for the numbers, inventories fell by $8.5 billion in the third quarter, after rising $39.1 billion in the second quarter.
Basically this tells us that confidence in the American consumer by U.S. businesses is not high. If businesses were expecting strong demand in the current quarter and those ahead, they would be more willing to stockpile inventory so that they have product on hand.
Rather, by staying lean, business costs remain lower which can help the bottom line. There are two ways to increase profits; generate more revenue or cut costs. Lower stockpiles of goods fits in the latter. Businesses are basically more confident that keeping costs low is a better bet than on consumers buying more.
What’s a bit troubling, consumer spending, which makes up two-third of GDP, came in at 2.3 percent for the quarter, down slightly from the first estimate of 2.4 percent. So it’s not like spending is dead, it just looks like businesses are betting it is going to slowdown.
There is one caveat here, the tsunami in Japan. Many tech companies struggled to get parts as a large chunk of semiconductor components are manufactured there. So in that instance, lower inventory was not really a choice. How much of an impact it had on the overall softening of inventory levels remains to be seen, we likely won’t know the full affect until the first quarter.
Additionally, the Commerce Department reported that Americans after tax incomes fell by the largest amount in two years, due to high unemployment and lower pay raises. That being said, I guess we cannot be surprised businesses are slow to restock inventory.
Let’s revisit a point that has become a staple in this letter, year-over-year GDP. As for the latest reading, third quarter year-over-year GDP growth now stands at 1.5 percent, following the 1.6 percent registered in the second quarter. Remember, whenever this figures falls below 2 percent a recession follows. We are now going on a second consecutive quarter of sub 2 percent year-over-year growth.
Please see the below chart for reference:
I don’t want to sound like a broken record, but if I see a data trend, I am going to play it till it breaks. Yes, I expect the U.S. economy will fall into another recession in the near future; a double-dip is very likely.
When this occurs is up for debate, especially considering fourth quarter GDP estimates call for a rise from third quarter GDP. However, we need to keep an eye on the year-over-year figure an that 2 percent threshold.
My portfolio is still in defensive mode; high yielding utility type stocks and gold related securities.
NOTE: I will be traveling to Australia for a few weeks so there will likely be a delay between letters. I apologize for the delay on this one.
Your waiting to see the final GDP reading analyst,
Mitch Jaworski