The Inside Scoop on The Economy's Next Big Shift

It’s Friday and that means it’s time to review the latest economic data and identify which pockets of the economy are heating up and which are slowing down. Don’t worry about catching every headline and every report throughout the week—I recap all of the most important news impacting your wealth right here every Friday. Let’s take a look at this week’s big headlines, starting with the market moving Q3 GDP report:

Third-Quarter GDP Growth Surprises Economists

The Commerce Department announced that its preliminary figure for annual third-quarter GDP growth was 3.5%. This trounced economists’ consensus estimates of 3.0% annual growth.

Fueling GDP growth was the fact that exports surged 7.8% in the third quarter, while imports declined 1.7%. This export boom caused the final sales of U.S. good and service to grow by 4.2%, which is the largest gain since 2006; this contributed to 1.32% of overall GDP growth. A 16% jump in defense spending caused federal spending to rise by 10%, which also positively influenced GDP growth by 0.8%.

Inventories rose by $62.8 billion in the third quarter, down from $84.8 billion in the third quarter; this actually reduced GDP growth by 0.57%. Consumer spending grew at a 1.8% annual pace in the third quarter, down from a 2.5% annual pace in the second quarter. Business investment grew at a 7.2% annual pace in the third quarter, down from an 11.2% annual pace in the second quarter. Despite slower consumer and business spending, overall GDP growth was still very solid and respectable in the third quarter.

Businesses Err On the Side of Caution…

In September, durable goods orders contracted 1.3%. This came as a surprise to economists, who were predicting a 0.6% gain. The bulk of the decline came from the volatile transportation sector, specifically a 16.1% drop in commercial plane orders. Excluding transportation, overall durable goods declined a more modest 0.2%. Declining defense and computer orders dragged down core durable goods. Tellingly, orders for core capital goods (which is a common measure of business sentiment) fell 1.7%; this is the largest such decline in six months. What this report is telling me is that businesses were more cautious with their investing in September. However, the next report that I’ll cover bodes well for businesses in October.

…While Consumers Get a Confidence Boost

In October, consumer confidence rose to a 94.5 reading, up from a revised 89.0 reading in September. (September’s original reading had been 86.0). The large jump in consumer confidence was well above economists’ expectations, which had called for just an 87.2 reading. Contributing to higher consumer confidence was an improvement in consumers’ present situation, an improved job market and their optimism for future earnings potential. From what I’m seeing, consumers are celebrating lower energy prices and increased purchasing power. This significant rebound in consumer confidence bodes well for the upcoming holiday shopping season–and the next earnings announcement season.

Layoff Activity Hovers Around 14-Year Lows

For the week ending October 25, initial claims for unemployment ticked up by 3,000 to a 287,000 annual rate. Economists had expected the measure to remain at 284,000. Meanwhile, the four-week moving average fell by 250 to 281,000. Unemployment claims, a key measure for layoff activity, continues to hover around a 14-year low. It will be interesting to see how this trend impacts the October unemployment rate, which will be released next Friday.

Consumer Income and Spending Takes a Breather

In September, personal income rose by $22.7, or 0.2%. This underperformed economists’ estimates of a 0.3% increase and also represented a slowdown from August’s 0.3% gain. Meanwhile, personal spending fell 0.2%, also below economists’ estimates of a 0.1% improvement. This followed a 0.5% gain in consumer spending in August. While this report wasn’t as strong as it could have been, the general expectation is that consumer spending is going to be strong in the fourth quarter. Rising consumer confidence, an improving jobs situation, and falling gasoline prices should all boost consumer spending. Meanwhile a separate report from the Labor Department announced that September wages and salaries jumped 0.8%, representing the largest gain in over six years.

That’s all I have for you this week. I’ll be in touch with the latest Portfolio Grader changes and Stock of the Day on Monday.

Have a great weekend,

Louis Navellier

Louis Navellier

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