Brace for Moderate 4Q GDP Increase as Weather Cools

Brace for Moderate 4Q GDP Increase as Weather Cools

INDICATOR: August Industrial Production and Import and Export Prices

KEY DATA: IP: +0.4%; Manufacturing: +1.0%/ Imports: +0.9%; NonFuel: +0.7%; Exports: +0.5%; Farm: -2.2%

IN A NUTSHELL: “The manufacturing rebound remains on track and that indicates that consumers are still spending.”

WHAT IT MEANS: It is clear that despite the end of the enhanced unemployment payments, the economy continued to heal quite well during the summer. Housing is booming, payrolls are rising and the manufacturing sector keeps getting better. Manufacturing output surged again in August, the fourth consecutive large rise. Every industry group posted decent to strong gains except for the vehicle sector, which had come back sharply the previous three months. A decline in assemblies caused output to fall, but given the continued rise in sales and low level of inventories, that should turn around.

Compared to where we were before the pandemic closed things down (February), production is still off 6.7%. A number of industries, such as furniture, textiles, computers and electronics, and electrical equipment and appliances are still off double-digits compared to where they were earlier in the year.

Import prices spiked in August, its fourth consecutive large rise. While energy costs continued to jump, they were not totally out of control. Other areas also posted decent gains. Nonpetroleum industrial prices continued to surge and food costs were up solidly. Consumer, vehicle and capital goods import prices all rose modestly or moderately, indicating that price pressures on consumer costs may not be widespread. As for exports, they too were up, but the farm sector didn’t benefit. Agricultural export prices were still down over two percent from August 2019.

One other report was released this morning. The New York Fed’s Empire State Manufacturing Index rose sharply in the first part of September. New York is not a major manufacturing state, so it isn’t clear if this signals a further acceleration in the industrial rebound, but it is still good news.

IMPLICATIONS: We should expect to see the economic numbers start settling down over the next few months. Some states are continuing to reopen, but most states are largely on hold. As September rolls on and the weather cools off (it’s only 63 at 10 AM where I am right now), the joys of outdoor dining will fade. So the rebound in employment may not be as great as expected, especially when we get to the last quarter of the year. And few states are ready to open up at 100% right now. That has two major implications. First, job growth is likely to fade while the decline in the unemployment should slow.

However, there is still room to reopen further, so the payroll rise and unemployment rate drop could be larger than normal for a while. What I am saying is don’t expect the economy to keep adding a million or more jobs each month or the unemployment rate to decline by a percentage point. Half those changes would be great but that may be asking too much. And with the next stimulus package possibly never coming, by year’s end, we could be seeing limited improvement in those numbers.

Nevertheless, it looks like the recovery could stay on the fast track for a month or two before reality starts setting in. That points to a very strong third quarter GDP gain, but a relatively moderate fourth quarter increase.

Investors are likely to keep their eyes strictly glued to the recent past and the markets could keep going up.

As for the Fed, it is meeting today and tomorrow and there is little that is expected to come out of the meeting. Indeed, barring a major rebound in the virus, little is expected for the next couple of years. The members could keep phoning, or should I say videoing it in. It would save time and money.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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