3Q15 GDP, 2nd Reading (112415): An Annualized 2.1 Percent, Up From Original 1.5 Pct.; Inventory Adjustment Adds 0.85 Pts., All Other Elements Subtract 0.27 Pts.; Inventory-Driven GDP Crash May Be on the Horizon

Predictions per Yahoo’s Business Calendar: Briefing.com says it will come in at an annualized 2.1 percent, up from the original reading of 1.5 percent, while the “markets” predict 2.0 percent.

The theory is that the inventory-related GDP decrement wasn’t as large. If that’s the case, this quarter’s pickup may hurt fourth-quarter results (update: currently estimated at 2.3 percent by the Atlanta Fed and 2.4 percent by Moody’s).

I keep waiting for the realities of lower orders and sales to affect GDP, which they thus far haven’t, because consumer spending, while far from robust, hasn’t tanked. But if there’s going to be a big downside surprise, I don’t think we’re going to see it in this report … but I do think it’s coming in the next 3-5 releases.

The report will be here at 8:30.

HERE IT IS (full report text link):

Real gross domestic product — the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes — increased at an annual rate of 2.1 percent in the third quarter of 2015, according to the ”second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.9 percent.

The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 1.5 percent. With the second estimate for the third quarter, the decrease in private inventory investment was smaller than previously estimated.

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, state and local government spending, residential fixed investment, and exports that were partly offset by a negative contribution from private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the third quarter primarily reflected a downturn in private inventory investment and decelerations in exports, in PCE, in nonresidential fixed investment, in state and local government spending, and in residential fixed investment that were partly offset by a deceleration in imports.

… Profits from current production

Profits from current production (corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)) decreased $22.7 billion in the third quarter, in contrast to an increase of $70.4 billion in the second.

I’ll have the line-item comparison chart up shortly.

______________________________________________

UPDATE: Here it is —

The inventory change revision added 0.85 points to GDP, while other changes subtracted 0.27 points (consumption, -0.14; fixed investment, +0.07; net exports, -0.19; government, -0.01).

So the revision shows that the third quarter was fundamentally a bit weaker.

UPDATE: Zero Hedge — “we now expect substantial downward revisions to Q4 GDP in the coming hours as Wall Street has no choice but to assume the inventory reduction will now be shifted to Q4.”

UPDATE 2: Let’s also be clear about the impact of inventories. It’s potentially confusing and I’ll have to confess that I barely understand why it works as it does, but here’s how the inventory change factor affects GDP (original source; see Page 7-4):

In the third quarter, we had the opposite of scenario (2) above (in 2009 dollars, annualized, so divide by 4 to roughly determine the actual changes):

• Second-quarter inventories increased by $113.5 billion (see Table 3 at today’s text release).
• Third-quarter inventories increased by $90.2 billion. (This contradicts the original post-release Associated Press report — since corrected without notice — which told readers that the negative inventory contribution to GDP occurred because stockpiles were sharply reduced.)
• Third-quarter inventories increased, but by $23.3 billion less than they increased in the second quarter.
• The decrease in the amount of additional accumulation is what led to the GDP decrement of 0.59 points.
• Before today’s revision, the decrement had been 1.44 points, because the third quarter’s original accumulation (still positive) was only $56.8 billion (before being revised to the $90.2 billion noted above).

This has HUGE implications for the fourth quarter of this year and the first quarter of next year.

Imagine how serious the hit to GDP will be if manufacturers and wholesalers actually reduce their inventory levels — which, based on inventory-to-sales ratios and inventory-to-shipments ratios, are dangerously high in historical context — or even just cease additional net stockpiling.

If a $23.3 billion annualized reduction in additional accumulation meant a 0.59-point GDP hit, no additional accumulation in the fourth quarter, which would be a $90.2 reduction in additional accumulation, would crash GDP by over 2 full points (0.59 times 90.2 divided by 23.3 equals 2.28).

If businesses actually reduce inventories by $50 billion — which would still leave the ratios noted earlier uncomfortably high — the GDP hit would be over 3-1/2 points.

I suspect that the Obama administration’s economic team is desperately trying to figure out how to convince companies to keep those stockpiles growing at least modestly for at least another year, even if business conditions don’t justify it, so this problem of inventory overaccumulation gets dumped on the next presidential administration.

Note that an interest rate hike by the Fed would instantly increase inventory holding costs and likely spur inventory reductions.

Based on that factor alone, and the potential economic/political impact just described, it would seem wise to bet against the Fed increasing rates.