Economists Say Contraction in U.S. Q3 GDP Confirms Recession
U.S. Gross Domestic Product was slightly better than the market consensus, but economists' reactions were far from optimistic following the report. Most analysts, if not all, are expecting the fourth quarter to be worse than Q3, with some revising their forecasts downwards on Thursday morning.
The advance GDP report showed the U.S. economy contract by 0.3% in Q3, against expectations of a 0.5% decline, according to the Bureau of Economic Analysis. The previous month's 2.8% growth was unrevised.
"The upside surprise to the headline masks a very poor print - the US Consumer is in full retreat," said T.J. Marta, fixed income strategist from RBC Capital Markets.
Personal consumption - which accounts for more than 70% of GDP - contracted by 3.1% in the quarter, marking the first quarterly decline since 1990 and the deepest cut since 1980. Economists were looking for only a 2.4% reduction.
Marta said Q4 GDP will be even worse as falling house prices put pressure on consumers, while stock markets are depressed, the jobs market has deteriorated, and a global slowdown will cramp exports.
The negative figure is the second nonconsecutive decline in quarterly GDP since the credit crisis began in August 2007, as the final quarter of last year saw a 0.2% contraction. A recession is informally defined as two consecutive quarters of negative GDP, and if economists are correct in saying the current quarter is worse than the last, then the U.S. is squarely in a recession right now.
"We expect the economy to endure a deep and prolonged recession and when any recovery does finally take place, we expect it to be lacklustre at best," said Paul Ashworth, senior U.S. economist at Capital Economics, who revised his Q4 forecast downwards following Thursday's release.
"The collapse in activity in Europe and Asia, along with the dollar's resurgence, suggests that exports will soon begin to contract, while no sector is going to get harder by the credit crunch than commercial real estate. Overall, in a change to our forecasts we now expect US GDP growth to contract by 1.5% in 2009 (previously -0.5%) and remain unchanged in 2010 (previously +0.5%)," he said.
Helping GDP growth was an 18.1% pace of growth in national defense spending (versus 7.3% in Q2), an increase in government consumption to 5.8% (versus 3.9% in Q2), and continued expansion in exports at 5.9% (down from 12.3% in Q2).
Guy Lebas, fixed income strategist at Janney Montgomery Scott, said the Q3 U.S. GDP report was very much as anticipated, but noted that exports won't be able to maintain such a positive pace going forward.
"There's no reason to expect that export growth will provide any benefit in 4Q, though the continued decline in oil, if it manages to sustain, should reduce imports rather sharply," he said.
ING's James Knightley went so far as to say that the U.S. will see four consecutive quarters of negative GDP. "The negative growth rate in consumption and investment looks set to continue and we doubt that the inventory and net export boost to growth will last," he said.
"Indeed, we look for four consecutive quarters of negative growth with the real threat that nominal GDP growth turns negative for the first time since 1H 1958. This suggests further policy easing is likely with another 50bp rate cut expected in December," he added.
Overall, there appears to be no doubt that the U.S. is in recession. The only question is how deep and prolonged it will be.
Meanwhile, writing on the higher-than-anticipated price index for core personal consumption, which advanced by 2.9%, economists at RDQ said the Fed has nothing much to worry about on the inflation front.
"In other times, the inflation side of the report would have been troubling, they said. "
By Patrick McGee and edited by Stephen Huebl
©CEP News Ltd. 2008