Q3 US GDP Oct 29

The US reports Q3 GDP at the end of the week. Expectations appear to have crept up and now stand around 2%. This is after a disappointing 1.7% annualized growth in Q2.

Part of the improvement is expected to come from consumption, which is expected to tick up to 2.4% from 2.2%. This would be the strongest since before the crisis began. In the 2003-2006 period, consumption rose between 2-4% per quarter at an annualized rate. Given the high levels of unemployment and job insecurity and weak wage growth, the Q3 rise would be impressive.

Conventional wisdom holds that American households are de-leveraging. Yet, Bernanke and others have acknowledged that some of the reduction of household debt has comes from write down and defaults rather than paying down the debt.

As is its habit, some of America's consumption will be met via imports. Through August, the 3-month moving average of imports of consumer goods stood at $42.3 bln. In Aug 09, the 3-month moving average stood at $35 bln. While US consumption may be behind some increase in US imports, businesses have also been importing more capital goods and industrial supplies. Specifically the 3-month moving average of capital goods stands at $38.2 bln up from $30 bln in Aug 09. Imports of industrial supplies has risen to $49.6 bln from $37.6 bln.

There are a couple of take aways from this note:

1. The first estimate of Q3 GDP will be released Friday. Modest improvement from the 1.7% in Q2 is expected.

2. Consumption is expected to have contributed to the stronger growth

3. Imports not only helps meet consumption but also business investment.