Real GDP Was Revised to a 3.9% Annual Growth Rate in Q3
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Implications: The bull market will continue to run. Forget the surprise upward revision to real GDP for a second. The best news in today's report was that corporate profits grew at an 8.6% annual rate in Q3 and are at a new all-time record high. Ultimately, high profits are why equities are undervalued and today's data supports further equity gains in the year ahead. The government's measure of profits fell steeply in Q1, but the sharp rebound in the past couple of quarters suggests the drop was weather-related, just like the temporary drop in real GDP. The economy grew at a 3.9% annual rate in Q3, which is an improvement from the 3.5% rate reported a month ago. In the past year – which includes the weather-related problems in Q1 as well as the rebound – real GDP is up 2.4%. Real GDP is up at a 2.3% annual rate in the past two years, the same exact pace since the recovery started in mid-2009. However, we expect the pace of real GDP growth to pick up for the next couple of years. Nominal GDP (real growth plus inflation) was revised up to a 5.3% annual rate in Q3 from a prior estimate of 4.9%. Nominal GDP is up 4% from a year ago and up at a 3.9% annual rate in the past two years. These figures show the Fed's target of essentially zero for short-term interest rates is too low and monetary policy is too loose. On the housing front, the national Case-Shiller index, which measures prices across the country, increased 0.7% in September and is up 4.8% from a year ago. The largest gains in the past year have been in Miami, Las Vegas, and San Francisco. The FHFA index, which focuses on homes financed with conforming mortgages, was unchanged in September but up 4.3% versus a year ago. In the year that ended in September 2013, the Case-Shiller was up 10.6% while the FHFA was up 8.3%. In other words, price gains have continued in the past year but at a slower pace. For the year ahead, prices will keep working their way higher but at an even slower pace, more like 3 – 4%. In other news this morning, the Richmond Fed index, a measure of mid-Atlantic manufacturing sentiment, fell to +4 in November from +20 in October. So factory activity is still expanding, just not as quickly.

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Posted on Tuesday, November 25, 2014 @ 10:18 AM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.