On Friday, the BEA released the first estimate of 3QA GDP. The headline rate was 2.9%—a welcome change from the previous three quarters. However, this marked the 8th consecutive quarter below 3%:
PCEs continued their strength:
Durable goods purchases (blue) increased strongly for the second consecutive quarter. Service expenditures (green) maintained their recent pace. But non-durable goods (red) spending was weak.
Investment spending was mixed:
Equipment spending contracted for the 4th consecutive quarter. But nonresidential structures (purple) increased for the first time in five quarters. Residential spending (green) was flat.
Several areas supported growth:
In the previous four quarters, household spending (blue) was the primary growth driver. But last quarter, exports (red) and investment (purple) also contributed.
In other news, building permits increased, due to a slight increase in 1-unit structures and a large increase in multi-family applications. Durable goods orders continued their 1+ year sideways movement. But even so, the non-defense, ex-aircraft number continues its slight downward trend. This isn’t fatal, but it does indicate a weakness in business investment. And the Case-Shiller index rose, indicating there is adequate housing demand to pull prices higher.
Economic conclusion: the GDP number is clearly this past week’s stand-out economic report. The 3rd quarter's 2.9% increase was a welcome change from the previous three quarters’ sub 1% readings. Other news was also positive. Building permits, which posted a strong increase, are a long-leading indicator; this bodes well for future growth. The Case-Shiller’s increase shows there is still plenty of demand for housing, which is supported by a strong jobs market, growing earnings and low interest rates. Overall, this past week’s news was very supportive.
Market Condition: The markets sold off last week; the SPYs dropped .67% while the QQQs were .89% lower. But the IJHs (mid-caps) moved down 1.75% while the IWMs fell 3.17%, indicating a clear risk off bias in the market. And the iShares Russell 2000's (NYSE:IWM) daily chart, which is a good proxy for the market’s overall risk appetite, points to continued weakness:
Prices recently broke a 71/2 month uptrend and are continuing to move lower, targeting the 200-day EMA. Momentum is negative.
The 3Q earnings season has been positive. From Zacks:
Including all of today’s earnings reports, we now have Q3 results from 198 S&P 500 members that combined account for 48.9% of the index’s total market capitalization. Total earnings for these 198 index members are up +3.2%% from the same period last year on +1.9% higher revenues, with 73.7% beating EPS estimates and 61.1% coming ahead of top-line expectations.
Factset is reporting similar news:
The blended revenue growth rate for Q3 2016 is 2.7%. If the index reports growth in sales for the quarter, it will mark the first time the index has seen year-over-year growth in sales since Q4 2014 (2.0%). Eight sectors are reporting year-over-year growth in revenues, led by the Consumer Discretionary, Real Estate, and Health Care sectors. Three sectors are reporting a year-over-year decline in revenues, led by the Energy sector.
The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for Q3 2016 is 1.6%. If the index reports growth in earnings for the quarter, it will mark the first time the index has seen year-over-year growth in earnings since Q1 2015 (0.5%). Eight sectors are reporting year-over-year earnings growth, led by the Real Estate, Utilities, and Financials sectors. Three sectors are reporting a year-over-year decline in earnings, led by the Energy sector.
So while the short-term market trend is probably lower, the earnings news not only prevents a sharp fall but also promotes a year-end rally.