MNI DATA PREVIEW: Storm Uncertainty Clouds GDP Forecast

By Sara Haire and Holly Stokes

HIGHLIGHTS

     -Median forecast for third quarter advance GDP is +2.7%, but has range of

+1.9% to +3.3% due to uncertainty from hurricanes.

-Some upside risk, given above 3% growth amidst 2004 and 2005 hurricane seasons,

and history of estimates coming in at or below the third quarter advance GDP

report in the last three years. 

-Expecting gains from inventory build up, business investment, and trade, but

forecasting a fall in residential investment.

-Analysts are divided on contributions from consumer spending, with many

questioning if a boost from auto sales will be enough to offset consumer

spending's slow start in the quarter coupled with the lost personal income and

spending during hurricanes.

-Uncertainty on forecast for government spending, expectations for rise on FEMA

spending vs construction spending data that shows decline in government

investment in August.

     WASHINGTON (MNI)- Expectations for Friday's third quarter advance GDP

report vary from a 1.9% gain to 3.3% rise, with the median landing on a 2.7%

increase, based on an MNI survey of analysts. 

     The chain price index is expected to post a 1.8% gain, with a narrower

range of up 1.5% to up 2.0%, following a 1.0% rise in the second quarter.

     This diverse range is due to the uncertainty of hurricane effects, but

analysts can agree that the hurricanes will cause at least a slight drag on

headline GDP. 

     Analysts, such as BMO, expect construction and trade to be impacted by

supply disruptions and port closures. However, Barclays notes that most

indicators rebounded strongly in September, which suggests a faster return to

normal levels and potentially a smaller disruption to GDP than some anticipate. 

     Despite concerns for a hurricane drag, BMO notes that there is an upside

risk, given that GDP actually strengthened and topped 3% during the strong

hurricane seasons of 2004 and 2005. However, even if GDP comes in at the softer

2.7% forecast, coupled with second quarter's 3.1% gain, this would still be the

best two consecutive quarters for GDP growth since the first half of 2015. 

     In September of 2016, analysts forecasted a gain of 2.6% for the advance

report for 3Q, but missed when the report saw a rise of 2.9%. In September 2014,

analysts again underestimated at +3.1%, with the actual registering a 3.5% gain.

However, in September of 2015, analysts were dead on with an expected 1.5% rise.

     Given the recent history of coming in right at or below the 3Q advance

report's estimate, some analysts low-balling headline GDP could be surprised

with a higher than expected reading.

     Gains are expected to come from inventory build up, business investment,

and trade. 

     After two quarters of soft inventory gains, analysts expect that business

inventories rebuilt significantly - contributing anywhere between 0.3 to 1.6pp

to the GDP growth. However, CIBC cautions that inventories may have suffered

from hurricane disruptions, and that this upswing could be delayed until the

fourth quarter. CIBC could be right considering Thursday's advance wholesale

inventories for September saw a positive 0.3%, while retail inventories fell

1.0% to end the quarter.

     Last quarter, business investment on equipment and software increased 8.8%,

and many analysts expect this growth to continue given the 2.2% rise in durable

new orders reported Wednesday. Credit Suisse speculates that equipment spending

could have accelerated to a three year high of 11%. However, analysts note that

soft business spending due to hurricane disruption to construction could

partially offset this rise. 

     While the advance estimate of US trade in goods for September does show a

modest widening, most analysts remain confident that the narrowing seen in this

quarter's trade balance reports should amount to a moderate boost to GDP growth.

Amherst Pierpont agrees that net exports should support third quarter growth,

but warns that October could see a flood of unusually heavy Christmas retail

imports. 

     While there is a general consensus on gains from inventories, business

investment, and trade, uncertainty lingers on how personal consumption will

factor into GDP. Analysts such as Barclays and CIBC expect that strong vehicle

sales, driven by replacements to hurricane damaged cars, will lift consumer

spending. 

     However, some analysts don't think auto sales will be enough to boost

consumer spending, causing a muted effect on GDP. Analysts attribute this

potential drag to a slow start in the quarter coupled with lost personal income

and spending during the hurricanes. 

     Government spending is another source of disagreement amongst analysts. BMO

argues that it should post a healthy gain from storm-related recovery efforts.

However, Capital Economics contends that third quarter construction spending

reports show a large decline in government investment, which will create a net

drag to growth. 

     In addition to these possibly weak readings, analysts generally agree on

expectations for a decline in residential investment. Bank of the West

speculates that the significant drop in housing starts for September will result

in more than a 7% drop for third quarter residential investment. Morgan Stanley

explains that constraints on home building have resulted in a lack of supply,

which slows down home sales.

     Contradicting Morgan Stanley's prediction of a slow down of new home sales,

the surge of 667,000 pushed the months' supply down, but the supply on the

market was unchanged. This could mean that as people begin rebuilding their

homes, material costs will continue to rise due to limited supply, potentially

forcing residential investment to rise into fourth quarter.  

     BMO believes that after hurricane drags and recovery effort boosts, the

economy should grow at a 2.25% pace, which is the average rate of the nine year

expansion. However, they caution that there will be several policy factors which

could present hurdles to growth, including tax reform, budget resolutions, the

debt ceiling, and trade protectionism - all of which could jeopardize consumer

spending and business investment via falling confidence levels. 

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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