Q4 GDP Growth Expectations Will Rise

Kansas City Fed Index Stays Slightly Negative

November Kansas City Fed manufacturing index which came out last Friday was at -3 which is the same as the previous month. The chart below includes all the regional Fed indexes. As you can see, with 5 indexes included, the regional Fed data implies the ISM PMI will be 51.4. It hasn’t called for a below 50 reading in this slowdown yet. 

Even as the Kansas City Fed index has been negative. November ISM manufacturing report comes out on Monday December 2nd. October reading was 48.3 and the consensus is 49.5. Technically, an ISM PMI below 50 is bullish for stocks, so this would be perfect. The index is low, but improving. That’s the best combination.

On a month over month basis, the production index fell from 8 to -5 and the volume of new orders index rose 10 points to -3. Most of the categories were negative except volume of shipments which rose from 0 to 7. This report was modestly negative similar to the ISM and industrial production readings. 

It’s a bit worse than the average of the regional Fed indexes. However, the 6 month expectations index showed great improvement. It was up from 2 to 15. Production and volume of shipments indexes were up from 2 to 25.  Volume of new orders index was up from 11 to 28. Capex index was up from 1 to 14.

It’s interesting to see such optimism. It makes me wonder if firms expect the trade war to end. Manufacturing comments section only includes one mention of tariffs which potentially confirms that. There were 10 comments included. The firm that mentioned tariffs stated, “Tariffs continue to reduce sales. No government decision or direction forces companies to make our own decisions.” 

The 2020 election might be the future excuse for calling capex. There were 2 comments on the election. One firm stated, “We believe things will improve into next year, but are very watchful of political turmoil and non-business friendly platforms.” If I were to guess, I’d say Bernie Sanders and Elizabeth Warren are considered to have non-business friendly platforms.

Chicago Fed Index Falls To Recession Territory

October national activity index fell from -0.45 to -0.71 which is below the -0.7 threshold which is consistent with recessions. You’re supposed to look at the 3 month moving average to determine recessions. This monthly report is a perfect reason why we look at the 3 month average since there was a one time negative event. 3 month average fell from -0.21 to -0.31 which is far from recessionary. A one time event was the GM strike which caused the production related category to fall from -0.36 to -0.55.

Now, I don’t expect there to be a major pop in industrial production in November, but surely this index will exit recessionary territory all else being equal. We only have the flash Markit PMI and the regional manufacturing reports to go by. Once the 2 PMIs come out next Monday, we will have a complete look at where industrial production is likely to go. 

Credit Suisse is predicting industrial production growth will bottom in Q4. Each of the major categories were negative and only 27 of 85 made positive contributions to the overall index. Keep in mind, there can be major revisions. Many of the indicators are estimated at the time of the report’s release. Only 51 of the 85 indicators had actual data included. Others were estimated. September reading was kept exactly the same at -0.45, but the August reading was revised up 8 basis points to 0.23.

Advanced Economic Indicators

Latest advanced indicators metrics will have big impacts on the GDP reports. September data was revised lower and the October data beat estimates. Advanced trade in goods balance beat estimates by $5.5 billion. Specifically, wholesale inventories were up 0.2% monthly in October after falling 0.7%. 

September report originally showed a 0.3% decline. Retail inventories report showed 0.3% growth which was up from 0.2% growth which was revised down by 1 tenth. International trade in goods report showed that the trade deficit in October fell from $70.55 billion to $66.53 billion. Exports fell 0.7% and imports fell 2.4%. That’s not a great signal for the economy, but it’s positive for GDP growth.

These reports will all help Q4 GDP estimates. Next update the tracking estimates give should be higher. The top chart below shows the trade contribution to GDP compared to the Atlanta Fed’s Nowcast estimate. Actual results are much higher. Obviously, the November and December reports might not show a lower deficit, but the Nowcast will first react to this update. Atlanta Fed Nowcast updates on Wednesday. I expect the Q4 GDP growth estimate to rise above 1%; it’s now only at 0.4%.

The bottom chart shows the estimated change in inventories versus the latest data from October. Again, this might not continue for the rest of the quarter. But as of now, the Nowcasts will need to impute a positive impact on Q4 GDP growth instead of a negative one. 

If Q4 GDP growth ends up being above 2% just because of inventory investment and trade, bears will be quick to point out the weakness in real final sales growth. At least there won’t be headlines claiming a recession is near like there would be if GDP growth was below 1%. These positive impacts came at a great time in the cycle if they stay true (if the November and December reports are close to the October reports).

Conclusion

Kansas City Fed index was slightly negative, but the expectations index was positive. Average of the 5 reports implies the ISM PMI will be above 50. That would be bad for stock returns. Best case scenario would for it to rise, but stay below 50.  Chicago Fed index was negative, but it wouldn’t have been recessionary if it wasn’t for the GM strike. It will increase in November. Finally, the inventories data and the trade data will push Q4 GDP tracking estimates higher. 

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