U.S. Growth Springs Forward In Q3

In times of market volatility, we advise investors to focus on the big picture. Right now, the big picture is full of many bright spots. The biggest bright spot was announced last week when the U.S. Bureau of Economic Analysis released the first estimate of third quarter U.S. Gross Domestic Product (GDP). They reported that economic activity increased 2.9% on an annual basis from the previous quarter and it was the biggest quarterly gain since Q3 2014.

As we can see in the graph below, U.S. growth was positive, but lackluster, over the past year. The three prior quarters all saw the economy grow less than 2% (annualized). With the third quarter growing a healthy 2.9%, we see that the economy is truly headed in the right direction.

Looking ahead, we can point to two encouraging economic statistics that suggest this growth may be sustainable. First off, the latest reading for manufacturing activity—the Purchasing Managers Index (PMI)—was released on November 1 and it showed that the level of manufacturing activity in the U.S. is picking up speed. Manufacturing activity expanded from 51.5 in September to 51.9 in October. Any value above 50 is considered expansionary, so seeing an increase in the pace of expansion is a sign of economic strength. According to the Institute for Supply Management, the organization that calculates and publishes the PMI, “the past relationship between the PMI® and the overall economy indicates that the average PMI® for January through October (51 percent) corresponds to a 2.5 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI® for October (51.9 percent) is annualized, it corresponds to a 2.8 percent increase in real GDP annually.” (Source: October 2016 Manufacturing ISM Report on Business, ISM.) Moderate growth seems sustainable according to this measure. The second economic reading we wanted to highlight is produced by the Atlanta Federal Reserve. The Atlanta Fed tries to predict the current quarter’s GDP with a measure called GDPNow. While GDPNow is not a perfect estimator, it does a fairly good job of predicting the magnitude and direction of economic activity. Currently, the GDPNow reading suggests that the economy is growing at a rate of 2.3% in the fourth quarter. While not as high as the third quarter reading, it is still indicative of a moderate pace of growth. Current and future economic activity appears to be on a solid path. This should provide a good foundation for future returns.

The views and opinions contained herein are those of Bellatore Financial, Inc. and have been researched and analyzed by Jonathan Scheid, CFA, President & Chief Investment Officer.

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