- by New Deal democrat
Three months ago, when the preliminary read on second quarter GDP was released, I started out with, "While Q2 GDP increased at a smart rate, there was bad news in both of the long leading indicators that are contained in the release."
Today's preliminary report on Q3 GDP makes it two quarters in a row.
Today's preliminary report on Q3 GDP makes it two quarters in a row.
There are two long leading indicators in the GDP report: real private residential investement and corporate profits. Since the latter is not released until the second or third revision, the less leading proxy of proprietors' income serves as a placeholder.
Real private residential investment declined at a -6.0% annual rate, following a revised -7.8% annual rate for Q2 (blue in the graph below). That's even worse when you take into account that the best measure is housing investment as a share of GDP (red). Since housing investment declined and GDP rose, that's an even bigger hit.
Secondly, proprietors' income rose slightly, only +0.2% overall and +0.6% on a nonfarm basis, before adjusting for inflation, which ran over 1% last quarter, meaning that on a real basis, both declined. The below graph compares nominal proprietors' income with corporate profits adjusted for unit labor costs, which had increased very slightly in Q2 (and hasn't been reported yet for Q3):
One quarter could just be noise. But two quarters in a row later in the expansion is at very least a yellow flag.
In the last month I have downgraded my long leading forecast from positive to neutral. I'm NOT negative now, but any further significant spreading or deterioration will cause me to turn negative for the first time since late 2006.
In the last month I have downgraded my long leading forecast from positive to neutral. I'm NOT negative now, but any further significant spreading or deterioration will cause me to turn negative for the first time since late 2006.
I'll update later with graphs once FRED posts the info. UPDATED
