LAWRIE WILLIAMS: Big rise in U.S. Q3 GDP prediction
Maybe the markets had been expecting the news, but the latest U.S. GDP data from the U.S. Bureau of Economic Analysis (BEA) put Q3 growth at an above-expectation positive 2.6% after negative Q1 and Q2 figures. If this is confirmed in subsequent checks and balances during the remainder of the year it looks as though the U.S. may well have avoided falling into recession this year after all, despite the high level of inflation and the aggressive rate increases imposed by the U.S. Federal Reserve to try and bring this high inflation level down.
“The increase in real GDP reflected increases in exports, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending, that were partly offset by decreases in residential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased,” the BEA report commented.
Of course in part the level of GDP growth reflects the continuation of the economic recovery from its partial collapse due to the Covid pandemic and the restrictions imposed to try and control its spread and the mortalities therefrom. Employment numbers were hit hard and had not fully recovered, so growth in employment numbers has tended to be supportive of those who have pointed to that as evidence that recession talk has not been realistic.
However, the 2.6% GDP rise looks impressive but may not be all it seems and may also not in reality be that realistic according to some analysts. The boost was almost entirely due to external trade figures which may well not be sustainable. It has been suggested that export levels will diminish – particularly given the recent strength of the dollar - while domestic demand will be adversely affected by changes in consumer financial priorities as incomes are squeezed and it is anticipated that periods of recession may well return next year, if not sooner. The strong dollar may also lead to a rise in imports as these may become more competitive price-wise too.
We have already expressed a certain amount of surprise at equity price strength in the light of high inflation and an aggressive Fed interest rate raising policy. Both of these, in our opinion, should have been negative for equities, But perhaps markets had been counting on at least temporary GDP growth all along and if so some of the equity price increases may have been a little more justifiable. But we would still be wary of blanket equity investment, even if the indexes appear to be rising, even if this proves to be a temporary phenomenon, which we fear it may be. We do not have a positive short or medium term view of potential growth potential for the majority of stocks.
Gold stocks, however, particularly those which pay dividends, may be an exception as even at current metal price levels earnings should remain positive and dividend prospects remain good. Longer term bullion prices in our view have decent growth potential too.
28 Oct 2022 | Categories: US