What's In Store for the Economy in Q4?

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:

Q3 Gross Domestic Product (GDP)

On Thursday, the Commerce Department released its third estimate for third-quarter GDP. According to the latest data, the U.S. economy grew at an annual rate of 3.5% in the third quarter. This was above the previous estimate of 3.2% annual growth, and well above the 1.4% growth logged in the second quarter.

Notably, this is the fastest the economy has grown since Q3 2014. The good news is that consumer spending was a little stronger than previously estimated, rising 3.0% compared with the original estimate of 2.8%. However, this represents a slowdown from the 4.0% jump in consumer spending during the second quarter. Meanwhile, nonresidential construction spending soared 12.0%, the largest jump since Q1 2014. The U.S. economy also benefited from a surge in soybean exports, so overall exports grew 10.0% in the third quarter.

At the same time, there were indications that the U.S. economy won’t be able to keep up this pace. Corporate profits were revised lower to reflect a 2.6% gain, down from the previous estimate of 3.5%. Corporate spending on equipment was also revised down to 4.5% growth, compared with the prior estimate of 4.8%. As a result, economists expect that the U.S. economy will grow at a more modest 2.2% pace in the fourth quarter.

Index of Leading Economic Indicators

The Conference Board’s Leading Economic Indicators (LEI) index was unchanged for November. This was below economists’ expectations of a 0.1% increase, and it also represents a slowdown from the 0.1% logged in October. Seven of the ten components were positive, including interest rate spread and jobless claims. However, housing and industrial slowdowns weighed on the index.

Personal Income Report

The November personal income report was also below economists’ forecasts. Wages were flat last month, compared with the forecast of 0.3% growth. By comparison, personal income rose a revised 0.5% in October. Personal spending rose 0.2%, also below the 0.4% target and below the 0.4% gain reported in October. Adjusted for inflation, consumer spending rose just 0.1%. Consumer spending was running hotter in the third quarter, so it appears that it’s cooling down in the fourth quarter.

Durable Goods Orders

Durable goods orders fell 4.6% in November; this is its first decline in five months. This was somewhat expected, as economists were expecting a 4.5% drop. The good news is that durable goods excluding transportation orders increased 0.5%, so the headlines weakness was largely due to a 74% plunge in civilian aircraft orders.

Existing Home Sales and New Home Sales

By far, the best news of the week was that both new home sales and existing home sales were higher than expected for November. Existing home sales jumped 0.7% to an annual rate of 5.61 million units, compared with the 5.5 million consensus forecast. U.S. home resales are now at the highest level since February 2007.

New home sales rose 5.2% to an annual rate of 592,000 units, above the 573,000 consensus forecast. New home sales are now at their highest level in four months. Overall, the housing market does not appear to be adversely impacted by rising mortgage rates.

The bottom line is that the U.S. economy is growing at a moderate pace. However, there still are areas for improvement, and we’ll likely see GDP decelerate in the fourth quarter. So while the Fed claims that it will raise rates three times in 2017, I’m skeptical that it will do so. After all, 2016 proved that the Fed doesn’t have the best track record in following through with its interest rate forecasts.

That’s all I have for you this week. As a reminder, Wall Street will be closed on Monday due to the Christmas holiday, so I’ll be back online on Tuesday with your weekly ratings changes.

Have a great weekend, and happy holidays!

Louis Navellier

Louis Navellier

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