U.S. growth probably slowed sharply in Q3…and winter is coming

October 29, 2015

RTR4U8M1.jpgIt’s probably a good thing the Federal Reserve concluded its latest policy meeting with a strong signal of its intentions, because GDP growth data expected later on Thursday are unlikely to cement rate hike views one way or another.

Fed Chair Janet Yellen on Wednesday kept the possibility of a hike at the Dec 15-16 meeting firmly on the agenda by specifically referring to it and saying consumer spending and business investment were increasing at solid rates.

But even if third quarter annualized growth hits the 1.6 percent Reuters median, the sharp brake from 3.9 percent in the second quarter just ahead of winter could raise serious concerns about growth momentum and not just an inventory run-down.

For now, economists are expecting a modest bounce back to 2.7 percent in the current quarter followed by 2.5 percent in the first three months of next year.

The world’s largest economy has, however, become infamous in recent years for grinding nearly to a halt over winter, which is just around the corner, and that more than anything could give the Fed good reason to be cautious about a December rate rise.

A great deal of the weakness has been trouble with seasonal adjustments, and in the first quarter of this year a lot had to do with major work stoppage at West Coast ports. But there is plenty that’s still not been completely explained.

Chances are U.S. growth data for Q3 may disappoint, despite a raft of late forecast revisions this week based on better trade data.

For Thursday’s GDP reading, economists’ forecasts are in a wide range, from a low of 0.8 percent to a high of 3.2 percent.

A majority of the top forecasters are slightly more pessimistic than the wider sample. Raymond James, currently number 1 on the Reuters ranking for GDP estimates, is forecasting 1.4 percent growth in Q3.

Optimists, those who have a higher forecast or think the slowdown is only temporary, say third quarter growth will be weighed down by businesses cutting back to reduce an inventory overhang — a transient phenomenon, they reason.

They also point to the rebound in exports and a sharp narrowing in the goods trade deficit in the second quarter as a sign that the drag from trade on growth will be less than earlier thought.

But the near 50 percent predicted scaleback in inventory build in the third quarter, after increasing by more than $100 billion in each of the last two quarters, will likely slice off much more from growth than expected.

And a resumption in the dollar’s relentless march that has soared over 20 percent since June 2014, now that a December rate hike is in focus, will probably put the brakes on exports once again.

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For the Fed, a call in December on whether or not to hike rates may remain as difficult as it has been up until now.

But with growth tapering off just before winter and the holiday season, even as employers cut back on hiring, the first rate increase in a decade may be a little bit harder to justify than it was last month or earlier this year.

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