U.S. Third-Quarter GDP Increased 3.5%… After expanding by 4.1% in the first quarter and 4.2% in the second, economic growth eased in the third quarter.
What it means – The Atlanta Fed GDPNow model forecast third-quarter growth at 3.6%, which is really close to what happened. But that ignores the fact that the model expected the economy to expand faster than 4% for much of the quarter, and only dipped lower in the last two weeks. The cool thing about the model is that it uses current economic reports to estimate growth, so the sudden decline in recent weeks reflects weak economic numbers in September.
This reinforces our view that the economy would lose steam as we moved farther from the tax cuts in the first quarter. We’ll likely get a nice boost from holiday spending, but the first quarter of 2019 could be very difficult.
U.S. Markets Swoon… Stocks had their worst day since 2010 on Wednesday. Technology and industrial companies led the decline.
What it means – And to think that this year had such promise. We noted in January that the markets were priced for perfection, and that’s what we got, at least through July. But then the cracks began to show.
The housing market appears to be in a funk, business spending is slowing down, and the Fed is raising interest rates. Now companies are guiding earnings estimates lower and the Trump administration is settling in for a long trade war with China. Homemade bombs sent to the likes of President Obama and Hillary Clinton don’t help the mood. We’ve moved from looking for the silver lining to focusing on the cloud. The mid-term elections could provide a much-needed bounce or a cause the markets to fall further.
New Home Sales Down 5.5% in September… This is the slowest rate of sales since July of 2017.
What it means – Higher prices, rising interest rates, and a lack of supply have held down new home sales all year. Now, it looks like two of those problems might be dissipating. Prices were essentially flat last month at $320,000 and are 3.5% lower than this time last year. As for supply, builders have continued to bring new units online.
With the slowdown in sales, supply now sits at 7.1 months. So far, it hasn’t made much of a difference. Sales are down 13.5% from this time last year, with the trend most pronounced in the West, down 15.8%. With the general economic mood turning sour and the Fed intent on higher rates, don’t expect a bounce in housing anytime soon.
Durable Goods Orders Up 0.8% on Defense Spending… The military doubled its aircraft orders, driving up the headline durable goods orders report. Without transportation, orders increased a disappointing 0.1%.
What it means – Durable goods orders for core capital goods are a decent proxy for business spending, and they weren’t encouraging last month. Business orders were expected to rebound 0.5% after falling 0.2% last month, but instead slid another 0.1%. One positive in the report was inventory orders, which increased 0.7% and add to third-quarter GDP.
The European Central Bank (ECB) Held Interest Rates Steady… The ECB reiterated that it will end its bond-buying program in December, but it will hold interest rates at current levels at least through the summer of 2019.
What it means – The ECB noted that it will hold rates at minus 0.40% for large depositors until inflation reaches 2.0%. That could take a lot longer than next summer. The German economy is slowing down, and the rest of Europe doesn’t look particularly healthy.
If economic activity in the Eurozone rolls over, expect the markets to forecast low interest rates in the economic bloc for a long time, which will drive up the value of the U.S. dollar.
Tesla Beat Earnings Estimates… Analysts expected the company to lose $0.50 per share on revenue of $6.1 billion. Instead, Tesla earned $1.75 per share on revenue of $6.9 billion.
What it means – Company Founder and CEO Elon Musk made good on turning the company to profitability in the third quarter based on sales of the Model 3 and managed to create positive free cash flow. The news sent the stock soaring higher.
It will still be very difficult for the company to justify its lofty valuation in the face of stiff competition starting this year. There’s no denying that Musk and Company came through in third quarter. Of course, it came at a price.
Consumer Reports notes that the Model 3 is average at best in new car quality, and the widely-hailed, gullwing Model X is plagued with quality problems, putting it near the bottom of the list. We’ll see how that compares with the new offerings from Jaguar, BMW, and Mercedes in the months to come, companies that actually produce cars and have dealer network to sell them.
Data supplied by Dent Research/Delray Beach Publishing
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