According to a research report released by CICC, the US GDP in the third quarter showed a month on month annualized rate of 4.9%, indicating a significant rebound in economic growth compared to the first half of the year. From a breakdown perspective, the rebound in inventory has made a significant contribution, indicating that restocking may have quietly begun, and the final sales after removing inventory are also strong, indicating that endogenous demand in the economy is still steadily expanding. Looking further, private consumption expenditure increased significantly in the third quarter, indicating that residents' consumption ability is still strong, which is inconsistent with the popular view that excess savings have been depleted in the market. Strong GDP supports higher and longer US interest rates, but has limited impact on the Federal Reserve's interest rate decisions. It is highly likely that the Federal Reserve will continue to pause interest rate hikes next week, waiting for more fourth quarter data to be released.
The main viewpoints of CICC are as follows:
The real GDP of the United States in Q3 showed a month on month annualized rate of 4.9%, and economic growth rebounded significantly compared to the first half of the year.
In the first two quarters of this year, the annualized growth rate of real GDP in the United States was 2.2% and 2.1% respectively, with a growth rate of 4.9% in the third quarter, indicating that the current economic performance is stronger than the first half of the year. In addition, this growth rate is also higher than the long-term potential growth rate of 2% in the United States, in other words, the US economy is still moving forward at a trend above growth rate.
From a breakdown perspective, the rebound in Q3 inventory has made a significant contribution, once again indicating that the US inventory cycle may start.
The impact of Q3 inventory on GDP growth is 1.3 percentage points, with a positive effect for the first time since the beginning of this year. Furthermore, both manufacturing and retail inventories have rebounded, indicating that the destocking since early 2022 has come to an end. In the report "The Inventory Cycle of the US Manufacturing Industry May Start", it has been pointed out that as the resilience of economic growth increases, the US may start restocking. In recent months, the PMI of the US ISM manufacturing industry has bottomed out and rebounded, and consumer spending continues to expand, which will drive inventory restocking. From today's GDP data, the viewpoint is supported.
Excluding volatile inventory, the final sales to the private sector are also strong, indicating that endogenous demand in the economy is still strong.
The final sales to domestic private purchasers in Q3 increased by 3.3% month on month, higher than the 1.7% increase in the previous quarter. Among them, private consumption expenditure showed particularly strong performance, with a month on month growth of up to 4.0%, a significant rebound from 0.8% in the previous quarter, and its contribution to GDP growth reached 2.7 percentage points.
Furthermore, the contribution of 1.1 percentage points comes from commodity consumption, while the rest comes from service consumption. Fixed assets investment increased by 0.8%, down from 5.2% in the previous quarter, but residential investment increased by 3.9%, the first positive growth since 21Q2. The positive investment in residential properties indicates that with insufficient inventory and rising housing prices, developers have an increased motivation to accelerate the construction of residential properties. It is expected that residential investment will continue to grow positively in Q4.
Why does the Federal Reserve continue to raise interest rates while US consumer growth remains so strong?
There are at least two reasons: firstly, the strong employment performance in the United States. The recently released data on non farm employment, vacancy rates, and the number of first-time applicants for unemployment benefits all indicate that the US job market is still tight, wage growth remains stable, and good employment and wage performance support residents' income growth, which is conducive to consumer expansion.
Secondly, the wealth effect supports consumption. Since the outbreak of the pandemic, the balance sheet of the US residential sector has significantly improved, and the rise in housing and stock prices has brought about wealth inflation. Further research has found that most of this wealth is concentrated in the hands of the baby boomer generation, most of whom are over 60 years old. As the retirement age approaches, they begin to use savings to support retirement, which is conducive to promoting consumption. In addition, the debt burden of the elderly is generally low and insensitive to rising interest rates, which also weakens the inhibitory effect of the Federal Reserve's monetary tightening on consumption.
The existence of the wealth effect brings another problem, which is that the consumption ability of American residents may be underestimated.
There was a previous view that the excess savings of American residents were about to run out, and consumption growth would be significantly suppressed. This view is based on a working paper by the San Francisco Federal Reserve, which assumes that American residents continue the savings trend before the epidemic and defines savings that are above the trend every month after the epidemic as excess savings, while savings that are below the trend every month are considered consumption of excess savings, From this, it can be concluded that excess savings will be exhausted.
This approach has certain reference value, but there are also two problems. One is that the assumption that the savings trend of American residents before and after the epidemic has not changed is too strong. If the savings decrease structurally due to some reason (such as more people retiring) after the epidemic, the excess savings calculated from this will be underestimated. Secondly, in the calculation, only flow savings were considered, without considering the growth of stock wealth brought about by savings. For example, if the $1 saved in 2020 is invested in stocks or other assets with rising prices, its net value will be higher than $1 by 2023. This change will bring about a wealth effect, making residents less willing to save and more willing to consume.
The strong GDP has limited impact on the Federal Reserve's November interest rate decision, and it is expected to continue suspending interest rate hikes next week.
Due to the GDP data reflecting the past Q3, it is unlikely that the Federal Reserve will change its interest rate decision in November solely based on this data. It is expected that the Federal Reserve will continue to pause interest rate hikes at next week's interest rate meeting, waiting for more Q4 data to be released. From the recent statements of Federal Reserve officials, it can be seen that due to the significant increase in US bond yields and the significant tightening of financial conditions, they tend to be more cautious and not in a hurry to further raise interest rates.
For the market, strong GDP data supports US interest rates staying high for longer, which in turn will increase pressure on future corporate profits and economic growth. After the release of GDP data, US stocks fell and US bond yields fell, indicating that many investors still have doubts about whether the US economy can withstand the current high interest rates.