- by New Deal democrat
As promised, here is my look at yesterday’s GDP report - which importantly was supplemented by this morning’s report of the employment cost index for Q3. More on that below.
Since my emphasis is on forecasting rather than dissecting the entrails of the recent past, I don’t have much to say about the contributions of inventories, imports and exports. For my one and only “nowcast” graph, here is the quarterly change in real GDP (blue), compared with “core” GDP, a/k/a real final sales to domestic purchasers (red):
These are pretty good numbers, unsurprising for an inflationary expansion.
But since there are two items in the GDP report that constitute long leading indicators, real private residential investment, a proxy for housing, and proprietors’ income, a placeholder for corporate profits which won’t be reported until next month, let’s take a look at each of them along with one other long leading indicators, real retail sales per capita.
First: real private residential investment as a share of GDP tends to peak about 7 quarters before the onset of a recession. Below is the 30 year history of real private residential investment:
Since investment declined slightly, I don’t even have to deflate by GDP, which increased. The point is, the housing component of GDP is a negative. Which, by the way, is consistent with what we are seeing with the other (and best) long leading indicator of housing, single family permits:
Second: corporate profits deflated by unit labor costs are also a long leading indicator. Because they don’t get reported until the second estimate of GDP next month, I use proprietors’ income, which typically tracks corporate profits sometimes with a one quarter delay, until then. Nominally these rose 0.9% in the quarter:
Now let’s turn to the deflator in this series, unit labor costs, which were reported this morning to have risen 0.8% in Q3. Significantly, the wage component rose 0.7%, while the benefits component (think in particular medical benefits) rose 0.9%:
On a YoY basis, unit labor costs were up 3.4%. But wages only increased 3.1%, while benefits rose 3.9%:
You can thank the Big Bad Billionaire Bust-out Bill for that.
All of which means that after adjustment, proprietors’ income rose only 0.1% in Q3:
While certainly not a downturn, this suggests growth in profits may be stalling.
Finally, financial indicators of interest rates and money supply dominate the long leading indicators. But along with the two discussed above, the other “real economy” long leading indicator is real retail sales per capita. And unlike profits and housing, these have been on a pronounced upturn, although in September they only rose 0.1%:
The past 15 years have been potent evidence that these three “real economy” indicators need to turn down; relying on the financial indicators alone is not sufficient. So to recap: housing in Q3 was negative, profits in Q3 were flat to slightly positive, while consumption per capita was soundly positive.
This is a mixed bag which is not consistent with a downturn in the next few quarters, although it does suggest the economy will have no more than a moderate expansion in real terms for at least the first half of 2027.
