U.S. Economy at Full Potential for First Time in a Decade The U.S. economy is running at its full potential for the first time in a decade, a new milestone for an expansion now in its ninth year. GDP growth was revised up to a 3.3% rate for the third quarter.
(…) It was the first time actual gross domestic product had exceeded potential GDP since the fourth quarter of 2007, suggesting the nation’s economic resources are being used efficiently. An acceleration in growth at this point could generate overheating that produces financial excess or long-elusive consumer price pressures. (…)
A key measure of business earnings strengthened last quarter as well. The Commerce Department said after-tax corporate profits, without inventory valuation and capital consumption adjustments, rose 4.9% in the third quarter from the prior period after falling 2.0% in the second quarter.
Compared with a year earlier, profits were up a solid 10.0% in the third quarter.
Looking ahead, economists expect the year will end on solid footing. Forecasters at Macroeconomic Advisers on Wednesday projected a 2.5% GDP growth rate for the fourth quarter. (…)
Haver Analytics adds
Consumer spending growth slowed to 2.3% (2.6% y/y), revised from 2.4%, versus 3.3% growth in Q2 as nondurable goods consumption more than halved their Q2 growth to 2.0% (2.5% y/y). (…)
The GDP price index rose a little-changed 2.1% (1.8% y/y). The personal consumption price index rose an unchanged 1.5% (1.5% y/y) [core +1.4%], up from the 0.3% Q2 increase. The business fixed investment price index rose 1.2% (1.3% y/y).
My additions: ex-inventories and trade (one third of the upward revisions in Q3), real final sales remained in the 2.0-2.5% range.
This morning’s release. Important points:
Nominal disposable income has accelerated in the last 2 months but consumption keeps rising faster. Since March, PDI is up +2.1% but PCE is up +2.9%. Last 4 months: +1.2% vs +1.8%. Savings have collapsed.
Core inflation has also accelerated from +0.06% monthly on average from March to August to +0.2% monthly in the last 2 months (+2.4% annualized).
Real expenditures were strong in hurricanes-impacted September but have generally been on the weak side since April.
The National Association of Realtors (NAR) reported that pending home sales increased 3.5% (-0.6% y/y) during October to an index level of 109.3 (2001=100). This followed a revised 0.4% September decline, initially reported as no change. Sales remained 3.6% below the peak during April 2016.
Changes in pending home sales were generally positive across regions of the country. In the South, the index increased 7.4% (2.0% y/y) following declines in five of the previous six months. The index for the Midwest gained 2.8% (-0.9% y/y), but remained down 5.8% from its March 2016 peak. The index for the Northeast ticked 0.5% higher (-1.9% y/y) after a 1.2% increase. The index for the West eased 0.7% (-4.4% y/y) but remained up sharply versus early this year.
China Economic Data Exceeds Estimates, Driven by Exports Activity in China’s critical manufacturing sector picked up in November, as robust demand for Chinese exports boosted the world’s second-largest economy.
An official gauge of factory activity, the purchasing managers index, edged up to 51.8 in November from 51.6 in October, the National Bureau of Statistics reported Thursday. The reading beat a median forecast of 51.5 by economists polled by The Wall Street Journal and kept the index above the 50-mark that separates expansion from contraction for the 16th month in a row. (…)
Orders for exports and imports showed improvement in November, according to subindexes, and that, economists said, bodes well for China’s trade figures, which will be released next week. (…)
Meanwhile, the service sector got a boost from the annual Singles’ Day shopping spree on Nov. 11, the biggest online-shopping event for young Chinese consumers. Mr. Zhao said the retail, wholesale, internet and delivery sectors all expanded faster in November, lifting the official nonmanufacturing PMI to 54.8 in November from 54.3 in October. (…)
- China’s trade partners’ economic activity keeps improving (white line), suggesting that export orders should remain robust. (The Daily Shot)
GAMES PEOPLE PLAY
GOP Mulls Shift in Corporate Tax as Senate Vote Nears Senate Republicans plunged into a debate about whether to cut the corporate tax rate by less than currently planned in a bid to come up with money to pay for other priorities and win votes for a sweeping tax package.
Bumping that rate to 21% or 22% is attractive to Republicans looking for money to expand the child tax credit, preserve a property-tax deduction or make other changes. Each point raises about $100 billion over a decade. Under current law, the corporate tax rate stands at 35%.
“Twenty-two percent doesn’t make this a horrible bill,” said Sen. Lindsey Graham (R., S.C.). “It’s like making a cocktail. If you’ve got to add more of this and less of that, I’m fine. Failure is not an option.” (…)
The knottiest Senate problem right now is how to design a trigger that would lead to automatic spending cuts or tax increases if revenue doesn’t come in as projected.
That could be crucial to getting support from senators such as Bob Corker (R., Tenn.). The trigger faces parliamentary hurdles and objections from conservatives who don’t want automatic tax increases baked into the plan, beyond the expiration of individual tax cuts in 2025. (…)
Any effort to set the corporate rate higher than 20% could run into resistance from the White House, where the insistence on a 20% rate has shaped the whole bill. Treasury Secretary Steven Mnuchin told The Wall Street Journal CEO Council gathering earlier this month that “it’s not going up” because “this is one of the things that the president feels very strongly about. Twenty percent.” (…)
Buried in the Tax Bills, Multiple Unintended Consequences Republicans’ determination to pass overhaul magnifies risks in an already complicated system
(…) The bills, as they stand, contain countless incentives for gamesmanship: differing tax rates for different types of foreign property and profits, arbitrary expiration and implementation dates to hold the 10-year deficit impact below $1.5 trillion, and changes to the Affordable Care Act to free up government dollars that could roil private insurance markets. “There are more ticking time bombs in this bill than a Road Runner cartoon,” says Martin Sullivan, chief economist for the nonprofit group Tax Analysts.
Two components in particular could have significant, unintended consequences: the treatment of pass-throughs—businesses such as partnerships that pay taxes as individuals rather than corporations—and of state and local taxes. (…)
Suppose you’re a doctor or lawyer. Daniel Shaviro, a law professor at New York University, says: “Not to worry. Some law partnerships or doctors own their buildings, so you form two pass-throughs, one is the service business and the other owns the building, rents it out to the first and gets the low rate.” Or, he says, a law firm may form a partnership that owns its name and charges partners royalties for its use. (…)
Losing the federal deduction [for state and local taxes] will raise effective tax rates on wealthy residents of states such as California, New York, Connecticut and New Jersey by two to five percentage points, according to Goldman Sachs economists. Some residents will move; others will never come. Goldman reckons New York City could lose 2% to 4% of its top earners as a result. The erosion of their tax base could imperil those states’ fiscal health and force them to slash public services. (…)
(…) “It has seldom been the case that equities, bonds and credit have been similarly expensive at the same time, only in the Roaring ’20s and the Golden ’50s,” Goldman Sachs International strategists including Christian Mueller-Glissman wrote in a note this week. “All good things must come to an end” and “there will be a bear market, eventually” they said. (…)
“Elevated valuations increase the risk of draw-downs for the simple reason that there is less buffer to absorb shocks,” the strategists wrote. “The average valuation percentile across equity, bonds and credit in the U.S. is 90 percent, an all-time high.” (…)
“The worst outcome for 60/40 portfolios is high and rising inflation, which is when both bonds and equities suffer, even outside recessions.” An increase in policy rates triggered by price pressures “remains a key risk for multi-asset portfolios. Duration risk in bond markets is much higher this cycle,” they wrote. (…)
One week after Goldman’s chief equity strategist David Kostin predicted a three-year bull market of “rational exuberance“, lifting his 2018 S&P price target from 2,500 to 2,850 rising to 3,100 in 2020, and stating that should the exuberance turn “irrational”, the S&P could rise as high as 5,300 by the end of 2020, another Goldman strategist, Christian Mueller-Glissmann, has decided it may be a good idea to play bad cop and cover all bases. (…)
Bitcoin Mania: Even Grandma Wants In Bitcoin has captured the imagination and money of investors, transforming the stateless digital currency from a curiosity among techies to a mainstream topic of interest. The result: Bitcoin’s value has doubled since mid-October and jumped more than 10-fold in 2017.
Rita Scott’s grandson convinced her in mid-November to get in on the latest investing sensation and buy bitcoin. “I thought it was a big coin,” the 70-year-old said. “I didn’t even know what it was, a piece of coin? Why would I invest in a piece of coin?” (…)
“Believe me, I didn’t have this much fun with T. Rowe Price , ” said the retired secretary and taxi driver Ms. Scott, referring to her mutual-fund investments. (…)
Over Thanksgiving dinner with friends last week, the conversation was dominated by talk of bitcoin.
“Even this woman who didn’t have a computer at home couldn’t stop talking about how bitcoin was going to reach $10,000 soon,” Mr. Spelce said. (…)
The 78-year-old investor began investing in bitcoin over the summer just to add some “spice” to his portfolio. Soon, he moved about 5% of his portfolio in the coin and an exchange-traded fund based on the currency. He started writing a periodic, informal note to about 30 friends, in which he talks about bitcoin’s price dynamics and the logistics of buying it. (…)
While some of his friends have expressed doubts, Mr. Horsely says about half a dozen joined him in buying. Meanwhile, he has accelerated his purchases, picking up more bitcoin on Nov. 24, and then Wednesday morning. (…)
For all that see it as “digital gold,” bitcoin funds are turning to physical safes—where they store sheets of paper on which cryptographic keys are printed—to keep their cryptocurrency safe from hackers and staff. That isn’t so much more convenient than real gold, and fund fees are often higher than for gold funds. (Streetwise: Bitcoin Isn’t What You Think)