GDP soared in Q3, rising at an annual rate of 5.0 percent, the fastest pace in 11 years, following a strong Q2 increase of 4.6 percent. Federal government spending, exports, and business capital outlays drove growth in Q3. Improvements in business activity have been widespread as industrial production has increased in 51 of the last 65 months to hit a record high, the service sector has expanded for 59 straight months, and durable goods orders have increased year-over-year in 51 of the last 59 months. Furthermore, the Small Business Optimism Index surged to an eight plus year high (highest since October 2006) after rising for the 11th time in the last 14 months. At 100.4, the Index finally returned to readings that have normally accompanied economic expansions and is in line with its pre-recession average of 100 from 1973 through 2007.
According to the third estimate, real gross domestic product or GDP (the output of goods and services produced within the U.S.) expanded at an annual rate of 5.0 percent in Q3, the fastest pace in 11 years (since Q3 2003), after increasing in the previous quarter by 4.6 percent. GDP has rebounded strongly over the last two quarters following a Q1 contraction. Economists had remarked that the weak showing in Q1 was largely the result of some temporary headwinds, including the cold winter, weak exports, and reduced inventory-building. Growth has exceeded 3.0 percent in four of the past five quarters; however, after including Q1’s contraction the economy has expanded just 2.0 percent so far for 2014, just below its 2.3 percent average annual performance during the five-year-old recovery. In Q3, federal government spending, exports, and business capital outlays drove growth. Business investment increased at a 7.7 percent rate, though it slowed from Q2’s 9.5 percent, and equipment spending increased a solid 11.0 percent. Federal government outlays surged 9.9 percent, including a 16.0 percent jump for defense, after falling 0.9 percent in Q2. Exports rose 4.5 percent, compared to 11.1 percent increase in Q2. Consumer spending, which accounts for more than two-thirds of the economy, increased 3.2 percent, accelerating from 2.5 percent in the previous quarter. Businesses also substantially reined in their stockpiling after rapidly adding to inventories in the previous quarter. Economist James Marple of TD Economics and Dean Maki of Barclays Capital noted that the healthy Q3 gains from trade and defense spending are unlikely to continue as the strong dollar is expected to hamper exports, and the Eurozone’s economy is slowing.
Rising in 13 of the last 16 months, the Industrial Production Index jumped to a record high in November, increasing 1.4 points to 106.7 and was up 5.3 points from a year ago. Additionally, the Index has risen in 51 of the last 65 months since bottoming at 83.5 in June 2009.
New orders for manufactured durable goods fell sequentially for the third time in the last four months, decreasing 0.9 percent in November, after rising 0.3 percent the previous month and was unchanged from a year ago. Nonetheless, new orders for manufactured durable have advanced year-over-year in 51 of the last 59 months. Excluding the volatile transportation component (aircraft orders), durable goods orders decreased sequentially for just the fifth time in the last 15 months, declining 0.4 percent in November.
The service sector grew (exceeding 50 on the ISM Non-Manufacturing Index) for the 59th month in a row, although the pace of growth decelerated from nearly a nine-year high. In December, the Index fell 3.1 points to register at 56.2 but was 3.2 points above its level of a year ago.
Up in 11 of the last 14 months, the Small Business Optimism Index surged to an eight plus year high (highest since October 2006), jumping 2.3 points in December to 100.4, and was 6.5 points above its level of a year ago. Lifted by the rally over the last 14 months, the Index finally returned to readings that have normally accompanied expansions and is in line with its pre-recession average of 100 from 1973 through 2007. NFIB Chief Economist said, “The Index showed strength in November but most of the gains were confined to just two categories. The December Index shows much broader strength led by a significant increase in the number of owners who expect higher sales. This could be a breakout for small business. There’s no question that small business owners are feeling better about the economy. If they continue to feel that way 2015 could be a very good year.”