Just eleven days before the U.S. election, we got amazing news.
The U.S. government reported that GDP expanded at a 2.9% annual pace in the third quarter of 2016 – a nice jump from the first half of the year when we grew by 1%.
It was also well ahead of consensus estimate for 2.5%.
This is a welcome change after anemic 1% growth in the nine months prior to this report.
However, before you cheer the advancement in third quarter GDP, know this. The beauty of the number is only skin-deep.
Once we dig deeper, we realize that things aren’t as rosy as hoped, because that growth came without acceleration in consumer or business demand.
Personal consumption – a key driver of growth – slowed to a rate of 2.1% from 4.3% in the second quarter. It was also worse than estimates for 2.6%.
In short, consumer spending grew at half the pace of the prior quarter. Part of the reason for that is a squeeze on consumer budgets, given higher gas and healthcare costs.
In fact, according to McDonald’s latest earnings report, the company notes that:
“There are broader macroeconomic issues of consumer confidence and just uncertainty of wage increases, the slight squeeze on discretionary spend with gas prices again back up and healthcare costs going back up. So, I think those are sort of things that we see affecting customers and basically the spare cash they have in their pocket,” said Steve Easterbrook, CEO of McDonald’s, according to this report.
Meanwhile, business spending on equipment fell 2.7%, dropping for the fourth straight quarter, forcing companies like Caterpillar (CAT) to report a 49% drop in third quarter profitability and lower its full-year outlook for the second time this year.
The Federal Reserve has raised concerns about slowing equipment sales in the past, too.
That is part of the reason they’ve been hesitant to raise rates as it’s an indication that business is not confident about economic growth.
Instead, most of the growth in third quarter GDP was a direct result of a 10% jump in exports, helped by a temporary boom in the shipments of U.S. soybeans after a bad harvest in South America. In fact, soybeans may have been responsible for at least a third of GDP growth.
Out of the $41billion of goods exported, soybeans accounted for $38 billion of that.
In other words, soybeans accounted for 0.9% of growth in the world’s largest economy, which is terrible news because it’s a temporary jump. It has no implications for future growth.
If we were to exclude soybeans, an inventory build of $12.6 billion, and contributions from Obama Care, which added 10% to the bottom line, the U.S. economy only grew at a pace of 0.9%.
Looking at the anemic consumer and business spending statistics, it’s hard to see how the GDP could grow by an amazing 2.9%.
However, despite all of the negativity, The Cheap Investor will continue to find deeply undervalued companies to recommend to our subscribers.