3rd Quarter GDP Surprises With a Shift in Consumption

Since we seem to have escaped the “September to Remember” followed by the “October Surprise” have we merely pushed out the inevitable to the “November Surrender”? Well that’s exactly what some are hoping. The same group I refer to as the stopped clock crew. Referencing even a stopped clock being right twice a day. Interpreted to, these folks have been predicting the market cratering and retesting the March lows, well, from April on. Now, a normal five to ten percent correction after having moved fifty percent off the lows would not be abnormal or worrisome. However, since many market participants missed this move, corrections thus far have been contained to the four to five percent area.



Earlier this week the bear camp as if protecting a cub, jumped on hinds and gnashed their teeth and had their way succeeding in pressuring the markets lower. This got the hair up on the neck of most bulls. Tuck tail and run or man up and stand ground. Thursday’s upside surprise to third quarter GDP gave the bull camp just enough to dig in their heels and flash their horns responding with a close to 200 point up day. The initial third quarter GDP release came in at +3.5% from a prior quarter reading of -.7. Quick to counter the good news, shorts pointed to government handouts, cash for clunkers being the big drive. Closer examination of the numbers reveals that even stripping out autos the US economy still expanded at a 1.9% annualized rate. Real personal consumption rose 3.4%. Direct evidence the consumer lives. To the contrarian camp, with unemployment still on the rise the US consumer, to shamelessly steal a Ricky Martin song title, is Living La Vida Loca.



On a final note with regard to 3rd quarter GDP, inventory draw down continued. Inventories contracted an estimated $130 billion. Shocking as that number seems, that’s an improvement from the previous draw of $160 billion last quarter. This data tells us the restocking phase of the recovery hasn’t even begun. We’re simply liquidating existing inventories at a lesser rate. My initial analysis points to a repeat performance of positive GDP growth in the fourth quarter and when the restocking phase does kick in, a resumption of job growth should accompany.




Many investors seeking alternatives to the paltry money market yields being offered today are turning to bond funds. With rates expected to rise sometime in 2010 Fixed Income investors should keep in mind the potential for losses here. As yields rise, prices which have an inverse correlation will be depressed. I utilize individual securities to manage duration, yield and valuations. When holding individual securities as opposed to a mutual fund, one can simply hold their investment until maturity to recoup the face amount plus interest accrued.

As always, before making any investments perform your own due diligence and consult your investment professional.