Disappointing Third Quarter GDP Points to Better Fourth Quarter

Third quarter GDP came out yesterday and at 2.0% quarter-over-quarter annualized disappointed versus the 2.6% expectation. The seeds, however, look to have been sown such that fourth quarter GDP has a chance to post something closer to 5%. The fingerprints of supply chain disruptions and rising virus cases can be seen across the report. However, as supply chain troubles get resolved, however slow that might be, and as virus cases continue to recede, the consumer and manufacturers looks poised to rebound.

Meanwhile, later this morning the September Personal Income and Spending numbers will be released. While those numbers were part of the GDP report we’ll get a better sense of consumer momentum heading into the fourth quarter. In addition to the income and spending numbers the report has the Fed’s preferred inflation measure, core PCE. Expectations have it edging down from 0.3% to 0.2% MoM but edging higher to 3.7% YoY versus 3.6% in August.  Yields, the inflation outlook, and fed funds forecasts will all react to the  latest inflation numbers.

In our podcast this week we talk with Dr. Tim Elmore, Founder and CEO of Growing Leaders.  Tim discusses his new book, The 8 Paradoxes of Great Leadership.  The iTunes link can be found here and the Spotify here.



Supply Chain Disruptions and Rising Virus Cases Noted Throughout Third Quarter GDP

The first estimate of third quarter GDP was released yesterday and it found economic growth slowed more than expected to the softest pace of the pandemic recovery period. Snagged supply chains and a surge in virus cases throttled both consumption spending and investment. Gross domestic product expanded at a 2% annualized rate versus a 2.6% expectation and after a 6.7% gain in the second quarter, fueled by stimulus checks and other emergency programs. Meanwhile, personal consumption, which is two-thirds of the economy, advanced at just 1.6%, a significant decline from the 12% clip in the prior period.

The footprints from snarled supply chains are all over the report. We all heard about semi-conductor shortages hampering vehicle assembly and sure enough motor vehicle output declined –41.6% annualized during the quarter and that led directly to a –2.39% cut in third quarter GDP.   Goods in total, while being up 13.0% annualized in the second quarter, fell –9.2% in the third due in part to lack of parts, etc.. that hampered production and held GDP in check.

The services side of the economy reflected virus-related difficulties  as case counts rose and slowed, or reversed, some of the economic reopening. For the quarter, services grew 4.7%  annualized but that was off the 7.9% annualized pace in the second quarter. Services alone added 2.77% to GDP but again that was off from the 4.62% it contributed in the second quarter. Now a big part of that second quarter gain was about stimulus checks so some slowing was to be expected but it’s likely the rising virus cases also hampered some services-side face-to-face spending during the quarter. Exports slowed too during the quarter as other countries dealt with the rising delta variant cases.

While the report disappointed, as supply chains get unsnarled and virus cases recede the seeds of a better fourth quarter GDP seem to be in the offing. Current Bloomberg estimates have the final quarter coming in at 4.9% as consumer spending improves to 4.0% from 1.8%.

Copper/Gold Ratio Sees 10-Year Treasury Yield in Equilibrium

It’s been awhile since we looked at the Copper/Gold Ratio versus the 10-Year Treasury yield so with all the recent concern over inflation, and a somewhat more hawkish Fed, we thought we would check in on our old friend to see what it had to say. Recall in the summer months, especially in July and August, the 10-year Treasury yield really lagged the ratio implying either the ratio had to come down or the yield had to rise.

Source: Bloomberg

Low and behold, both of those things happened and now as you look at the graph, the 10-year yield looks to be much more closely in line with the ratio implying the 10-year yield is more or less in equilibrium with what the ratio is signaling about future economic growth.

For those not familiar with the ratio it does have some merit to it’s construction and is not some random set of facts that happen to track Treasury yields occasionally. The idea is that copper is used in so many applications across a modern economy such that its demand is a good tell on the global economy’s outlook. Also, gold tends to rise on inflation and other fears and recede when market uncertainty is low. Of late, we’ve seen copper prices start to drop while gold has risen and that has contributed to the ratio’s recent decline. More importantly, the recent back-up in 10-year yields has brought it nearly on top of the ratio. Nothing says the yield has to stay near the ratio but it does imply it is in a comfortable zone at the present time.

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.41 0.73 1.02 1.37 2.01 2.47
0.50 0.39 0.70 0.96 1.26 1.87 2.36
1.00 0.39 0.67 0.93 1.22 1.78 2.23
2.00 0.66 0.87 1.14 1.66 NA
3.00 1.09 1.60 NA
4.00 1.55 NA
5.00 1.52 NA
10.00 NA

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Published: 10/28/21 Author: Thomas R. Fitzgerald