Macroeconomic Overview: In its first estimate, the Bureau of Economic Analysis (BEA) indicated the U.S. economy grew at a 2.9% annual rate in the third quarter. This was more than double the current estimate for growth in the second quarter (1.4%) and represented the fastest rate of expansion in two years. As has been the case in recent quarters, a driving influence behind the change in the pace of GDP growth was inventory. In recent quarters, reductions in inventory were a primary factor leading to lower readings. Since the second quarter of 2015, reductions in inventories subtracted between 0.4 and 1.2 points from quarterly GDP readings. In the third quarter, inventories added 0.6 points to the headline figure.
The rate of growth in consumer spending slowed from a very strong 4.3% in the second quarter to a healthy 2.1% in the third quarter. Changes in trade supported stronger GDP growth, with exports increasing at a faster rate than imports. After subtracting from growth in the second quarter, government spending added to growth in the third quarter. The savings rate, at 5.7%, remains high relative to the time period before the recession. While higher levels of savings are supportive of longer-term health of the economy, since it reduces households' exposure during downturns, savings also inhibit short-term growth by subtracting from spending.
Given the continual improvement in the labor market and the stronger growth in GDP, expectations are that the Federal Reserve will decide to make another incremental increase in interest rates at their meeting held December 13th and 14th. The details stemming from that announcement, as well as the results from the U.S. presidential election, should affect exchange rates.
Employment: The U.S. economy was estimated to have added 161,000 jobs in October. Revisions to figures for August (+9,000, from +167,000 to +176,000) and September (+35,000, from +156,000 to +191,000) lifted previous estimates by a combined total of 44,000 positions. On average, payrolls expanded by 181,000 jobs per month thus far into 2016 (January-October). Over the same time period last year, job growth averaged 219,000.
A reason why hiring has been slower this year is that the job market has been tightening. Evidence of this come from the declines in the unemployment rate and wage growth. The unemployment rate has been holding steady at levels between 4.9% and 5.0% for the past 13 months. These values are the lowest since the recession. Over the same time period, the size of the labor force has increased by nearly three million people. A flat unemployment rate with a larger labor force indicates an increase in the number of consumer with jobs and increase in aggregate national income.
Increases in wages have been compounding this effect. In October, average earnings rose 2.8% year-over-year. This was the highest rate of wage growth since the recession and represented the 20th consecutive month that wage growth has been higher than two percent. Normally, this would not be considered a strong rate of wage growth. However, this is not a normal time period. Inflation rates have been extraordinarily low, with rates since 2015 generally holding to levels below one percent. The separation between wage growth and inflation can be interpreted as a measure of growth in disposable income. Since the spring of 2015, that measure has been higher than it was before for the recession, indicating that consumers' disposable income has been expanding at a faster rate than it was prior to the recession.
Consumer Confidence & Spending: The Conference Board's Index of Consumer Confidence decreased 4.9 points in October. The decline followed the posting of the highest value since 2007 in September (103.5). The current reading of 98.6 remains one of the highest in recent years. A possible reason for the decline could be uncertainty regarding the impending election. Another factor could be seasonality. Last year, with the highest reading for the Index of Consumer Confidence was posted in September (102.6) and declined in October (99.1) and November (92.6). The National Retail Federation forecasts holiday spending to increase 3.6% year-over-year. Last year, holiday spending rose 3.0% year-over-year. Stronger income growth was cited as a primary reason that sales are expected to be stronger this season.
In September, the latest month with data on consumer spending available, overall spending was up 0.3% month-over-month (3.6% annualized rate) and was 2.4% higher year-over-year. Apparel spending rose 0.1% month-over-month (1.2% annualized rate) in September and was 0.5% higher year-over-year. Since mid-2015, annual pace of growth in apparel spending has been significantly slower (only 1% to 2%) than the strong rates experienced in 2014 and the first half of 2015 (between 4% and 6%).
Consumer Prices & Import Data: Average retail prices for apparel declined at the steepest rate in six months September (-0.7%). Year-over-year, consumer garment prices were marginally lower (-0.1%). Seasonally-adjusted import prices for cotton-dominant apparel decreased in September (-1.4% month-over-month). This is the lowest price since January 2011. Year-over-year, average import prices were 3.8% lower than they were a year ago.