Economic Commentary
Daniel Laufenberg, Ph.D.

Numerous economic data series are released between the publication dates of the Laufenberg Economic Quarterly (LEQ). These commentaries are designed to provide insight on the more recent data and their implications for the economic outlook.


Finishing strong
(October 14, 2011)

I continue to believe that real gross domestic product (GDP) will increase at a much faster pace in the second half of 2011 than it did in the first half, which may not be saying much given that real GDP growth averaged only 0.8 percent at an annual rate in the first half. My best estimate is that real GDP will grow least 3.0 percent on average in the second half, which is a tad less robust than anticipated in my August forecast but still well above the upward revised consensus (at least prior to today’s retail sales report). More importantly, real GDP growth will be fast enough in my opinion to pull the unemployment rate lower over the remainder of this year and into 2012. That too is much better than the consensus forecast at the moment.

Although several important data points for September are still missing, such as housing starts, industrial production, business inventories, nondefense capital goods shipments, and personal consumption expenditures, what we do have suggest that real GDP growth in the third quarter could be higher than most economists are expecting. To begin with, the data available through August already suggested that real GDP was on track to grow about 2% in the third quarter, which would be more than twice the average growth rate for the first half. More importantly, the limited September data released so far suggest that the advance estimate of real GDP growth for the third quarter, which is scheduled to be released later this month, will be even better than 2%. My estimate at the moment is that real GDP grew 3.0 percent at an annual rate in the third quarter and will accelerate to 3.5 percent in the fourth quarter.

First, the Institute of Supply Management Index for Manufacturing (ISM) was 51.6 percent in September, up from 50.6 percent in August. An ISM in excess of 42.5 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the ISM indicates growth for the 28th consecutive month in the overall economy, as well as expansion in the manufacturing sector for the 26th consecutive month. Based on the past relationship between the ISM and the overall economy, the average index for January through September (56.2 percent) corresponds to a 4.8 percent increase in real GDP. In addition, the ISM for September (51.6 percent), if annualized, corresponds to 3.2 percent real GDP growth. In other word, the ISM index continues to favor stronger real GDP growth than the consensus currently is forecasting.

Second, the Institute for Supply Management Non-Manufacturing Index registered 53 percent in September, 0.3 percentage point lower than the 53.3 percent registered in August. The implication is that the non-manufacturing sector continued to grow in September albeit at a slightly slower rate. On the other hand, the Non-Manufacturing Business Activity Index, one of the sub-indexes in the release, increased 1.5 percentage points to 57.1 percent, reflecting growth for the 26th consecutive month, suggesting that the pace of activity actually accelerated. It may be that the respondents' assessment of orders and employment, which accounted for the drop in the overall Non-Manufacturing Index, reflected an uncertainty about future business conditions and the direction of the economy more so than current level of activity. I continue to expect the level of activity over the remainder of this year and into 2012 to surprise to the upside.

Third, the employment report for September was better than expected, which seemed to contradict the lower employment index in the Non-Manufacturing ISM survey data. In particular, payroll jobs in the private service-producing sector increased 119 thousand in September, compared with a gain of only 57 thousand in August. Recall that initially the Bureau of Labor Statistics had estimated payroll jobs in August to be flat, causing many economists to lower their forecast of real growth in the second half of this year and in 2012. The meaningful upward revisions to payroll jobs in each of the prior two months, combined with a better than expected payroll gain in September, caused many to reverse their earlier decision. Indeed, the consensus estimate for real GDP growth in the third quarter went from 2.0 percent in early August to 1.7 percent in early September to 2.5 percent in early October. My guess is that over the next few days, the consensus estimate of real GDP growth in the third quarter will be revised even higher—probably closer to 3.0 percent.

Fourth, light vehicle sales should make a substantial contribution to real GDP growth in the third quarter as sales bounced back from May and June lows. Vehicle sales have averaged 12.5 million units at a seasonally adjusted annual rate for the third quarter, up from the second-quarter average of 12.1 million units.

Finally, retail sales jumped 1.1 percent in September, well ahead of the consensus estimate of a 0.6 percent advance. Excluding autos, sales still registered a better-than-expected increase of 0.6 percent. Although higher gasoline prices may have added a bit to the total sales gain, it did not account for all of it. In fact, the gains were relatively widespread across all categories. The exceptions were food, building materials and sporting goods.

The bottom line is that third-quarter real GDP growth probably was much better than the consensus expects, but probably not quite as strong as shown in my August forecast. I believe the same can be said about real GDP growth in the fourth quarter of 2011. However, for all of 2012, nothing in the recent data would cause me to change my forecast. I believe that growth will be very solid next year and that inflation will remain relatively benign. Whether the Fed can keep short rates at historically low levels for as long as currently advertised is the question. I continue to doubt that they can, but I didn’t think they could keep them at such low levels for as long as they have already. period


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For the current economic forecast, as well as other analysis and commentary, please visit the Stonebridge Capital Advisors website.

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The views expressed here reflect the views of Daniel Laufenberg as of the date referenced. These views may change as economic fundamentals and market conditions change. This commentary is provided as a general source of information only and is not intended to provide investment advice for individual investor circumstances. Past performance does not guarantee future results.

2011 Commentary

Finishing Strong
-- October 14, 2011

Living in interesting times
-- September 8, 2011

A not so pleasant surprise!
-- September 2, 2011

-- August 16, 2011

Debt ceiling politics
-- July 25, 2011

Q2 growth: Another disappointment likely
-- July 14, 2011

Interpreting the ISM manufacturing index and the employment situation report for May
-- June 4, 2011

A slower start to 2011 than anticipated earlier
-- April 14, 2011

Is the dollar's status as the reserve currency at risk?
-- March 21, 2011

More trouble in the Middle East
-- February 26, 2011

Searching for the next debt crisis
-- January 13, 2011

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