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Trading  | October 27, 2017

In the immediate aftermath of Hurricanes Harvey and Irma, Wall Street quickly trimmed its Q3 GDP forecasts from 3.0% to the low/mid 1% range, expecting a substantial, if brief, adverse impact on US growth from the storm devastation. However, moments ago the BEA surprised everyone when it reported that in its first estimate of third quarter growth the US economy grew an unexpectedly hot 3.0%, putting all fears of a hurricane-induced slowdown in the rearview mirror, and suggesting that the economy may indeed be starting to overheat with a second consecutive 3.0% or higher GDP print. The number was above the consensus estimate of 3.6% and just below the 3.1% in the second quarter.

The back to back 3.0% or higher prints are the fastest pace of growth since the  4.6% and 5.2% revised GDP growth reported for Q2 and Q3 2014.

Looking at the components, Personal Consumption rose 2.4%, above the 2.2% expected, and contributed 1.62% to the bottom line Q3 GDP, which while down from the 2.24% in Q2, was still stronger than expected. The increase in consumer spending reflected increases in spending on both goods and services. The increase in goods was mostly attributable to motor vehicles, and the increase in services primarily reflected increases in health care, in financial services and insurance, and in food services and accommodations.

The big driver of GDP growth was the jump in private inventories, which contributed 0.73%, or nearly a quarter, of the net GDP number. The increase in inventory investment primarily reflected increases in wholesale and in manufacturing inventories. The increase in business investment reflected increases in equipment and in intellectual property products; these increases were partly offset by a decrease in structures investment.

Additionally, for inflation watchers, the Fed’s preferred inflation metric, Core PCE rose 1.3% q/q in 3Q, in line with expectations, after rising 0.9% prior quarter; while PCE Prices advanced 1.5%, above the 1.2% expected. Final sales to private domestic purchasers q/q rose 2.2% in 3Q after rising 3.3% prior quarter.

Food prices increased in the third quarter following a larger increase in the second quarter of 2017. Energy prices increased in the third quarter of 2017 following a decrease in the second quarter of 2017. Excluding food and energy, prices increased 1.7 percent in the third quarter of 2017, compared with an increase of 1.3 percent in the second quarter of 2017.

Speaking of the hurricanes, the BEA said it’s “not possible” to estimate overall impact of Hurricanes Harvey and Irma on Q3 GDP.

During the third quarter, two major hurricanes caused severe damage and flooding in several states along the Gulf Coast. Hurricane Harvey made its initial landfall on August 25 in Texas, and made a second landfall in Louisiana on August 30 as a tropical storm. On September 10, Hurricane Irma hit the lower Florida Keys and the southern mainland of Florida. These disasters disrupted production at facilities such as factories, offices, and transportation centers. For example, oil and gas extraction and petroleum and petrochemical production in Texas and agricultural production in Florida were impacted. Other types of production, such as emergency services and rebuilding activities, increased. These impacts on production are included, but not separately identified, in the source data that BEA uses to prepare the estimates of GDP; consequently, it is not possible to estimate the overall impact of Hurricanes Harvey and Irma on 2017 third quarter GDP.

The BEA also said that the impact of Hurricane Maria not reflected in GDP because Puerto Rico and Virgin Islands not included in BEA’s estimates.

The bottom line: the stronger than expected GDP is raising concerns that the Fed may indeed be behind the ball, and that the hotter economic growth may soon translate into inflation and a resurrection of the Phillips curve, as a result risk assets have dipped on the news.

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