The long awaited inventory correction is finally arriving.
Moments ago the BEA reported preliminary Q3 GDP, which at 1.49%, missed both sellside consensus expectations of 1.6%, and tumbled from the 3.9% reported in the second quarter as the quarterly volatility continues at an unprecedented pace. This was the second lowest quarterly GDP print since Q1 2014 excluding the “double seasonal adjustment” meant to cover up the collapse in Q1 2015 GDP.
The component breakdown reveals that virtually every component of GDP was weaker, starting with Personal Consumption expenditures which dropped from 3.6% to 3.2%, missing expectations of 3.3% as a result PCE contributed 2.19% to the bottom line GDP number, down from 2.42% last quarter. Once again the biggest contributor to spending growth was healthcare expenses.
Fixed investment – something the Fed was bullishly touting in its statement yesterday, also tumbled and added just 0.47% to GDP down from 0.83%.
Net trade also detracted modestly from growth after a small contribution in Q2, and even government spending dropped, adding 0.3% to GDP, down from 0.46%.
But the biggest factor for the drop in GDP was what we had been warning for a while, namely inventories, which tumbled from a boost of 0.02% in Q2 to a negative 1.44% in Q3 – the biggest drop since Q4 2012, as the nominal contribution from inventories slid from $127.5 billion to just $62.2 billion. While this may seem like an inventory normalization, it was still an addition to GDP – recall that during the financial crisis, Inventories subtracted a whopping $718 billion from GDP over 8 consecutive quarters. At some point, that same liquidation cycle which can only be delayed so long, will take place once again.
