More Thoughts about US Q3 GDP

The next string of US real sector reports are likely to solidify evidence that the economy is gradually recovering.

Tomorrow should kick of the string with the first look at Q3 GDP, but the string of data is likely to include auto sales in September, which appears to possibly be the strongest since the cash-for-clunker program ended last summer and next week should finish with the first rise (modest) in headline non-farm payrolls since May.

Turning to GDP, a couple of the highlights may include, less drag by the foreign sector and better final sales.

One of the areas that will have among the largest improvements is the net export function. This cut Q2 GDP by 3.5 percentage points. It appears related to the end of a Chinese export subsidy program that exporters were trying to front run. The net export function will still likely be a drag on GDP but less than 1 percentage point.

Final sales will likely be better than Q2's disappointing 0.9% increase. It is possible that the final sales figure surpasses Q1's 1.2% rise.

In recent days, economists seem to have revised up their GDP forecasts a bit to just above 2%. A consensus report or even one a little stronger is unlikely to impact expectations in any kind of substantive way. Remember the Fed's signals about QEII are not because the central bank forecasts a new recession or actual deflation. Rather the justification is that the economy is not growing fast enough. Below trend growth risks too slow of improvement in the labor market. Most other major industrialized countries may be envious of the US growth, but among the policy makers and citizenry, it is not sufficient.