"Q3 2023 - Tasting Poison"
By: Joseph R. Tranchini, CFA, CFP®
GROSS DOMESTIC PRODUCT
- Aggregate Real GDP grew at its fastest pace since Q4 2021 in Q3 2023, coming in at a level of 4.9%. The current pace of growth experienced is over double what economists believe the long-term growth rate of the economy is. This is the fifth consecutive quarter of positive GDP growth at or above the 2.0% level. Over the past 5 quarters, GDP growth has averaged 2.9%. This quarter marks a large acceleration in growth from the previous quarter, which saw Real GDP growth come in at 2.1%1,2
- The Consumption component of GDP, which is the largest component within US GDP, grew at an accelerated pace in Q3 2023, coming in at a level of 4.0%, marking an acceleration from the prior quarter’s reading of 0.8%. Consumer spending on both Goods and Services not only remained positive, but each experienced a robust level of acceleration in the quarter. Goods Spending rose by 4.8%, a large increase from the growth rate of 0.5% in the prior quarter. The acceleration in Goods spending was driven by accelerations in Durable Goods spending, as well as Non-Durable Goods spending. Durable Goods spending growth grew at a pace of 7.6% in Q3 2023, up from -0.5% in the prior quarter. This acceleration was driven by increases in all Durable Goods categories and was not confined to any one specifically. Non-Durable Goods spending increased to a level of 3.3%, up from 0.9% in the prior quarter, which was driven by higher Food and Apparel spending. Consumer spending on Services grew by 3.6% in Q3, a relatively large increase from 1.0% in Q2. Some standout areas within Services spending included Housing & Utilities which grew by 3.6% in the quarter (up from 0.7% in Q2), Health Care Spending which grew by 3.0% (up from 2.5% in Q2), and Food Service & Accommodations which grew by 5.6% (up from -0.9% in Q2)1,2
- The Private Investment component of GDP continued to grow at an elevated pace, accelerating to a level of 8.4% in Q3 2023, up from 5.2% in Q2. The acceleration in Private Investment was driven by increases in both Residential Investment, as well as Inventory Spending. Residential Investment was buoyed by a sizeable acceleration in Single Family housing investment, which grew at a pace of 21.6%, up from just 1.2% in the prior quarter. Multi-Family housing investment also experienced a period of growth in Q3, coming in at a more normalized pace of 4.5%, down from 11.4% in Q2. Total additions to Inventories came in at an increased level of 80.6B in Q3 2023, marking an uptick from the prior quarter’s level of 14.9B. Q3 2023 breaks a 2 consecutive quarter streak of decelerating additions to Inventories 1,2
- Net Exports
- The U.S. Trade Deficit increased in Q3 2023, coming in at a level of -937B. The increasing Trade Deficit was driven by an increase in Imports, which outpaced a partially offsetting increase in Exports. U.S. Exports grew by 6.2% in the quarter, whereas U.S. Imports also grew by 5.7%. Growth in Exports was seen across both Goods and Services, which each growing by 7.5% & 3.7% respectively. Within Imports, both Goods and Service also experienced accelerations, growing by 5.9% and 4.8% respectively. Q3 2023 marks a stark contrast to Q2 2023 where both Exports & Imports experienced contractions.1,2
- The Government spending component of GDP accelerated in Q3 2023, coming in at a level of 4.6%, up from 3.3% in Q2. Both Federal and State & Local Government spending experienced growth in Q3, coming in at levels of 6.2% and 3.7%. This marks the fifth consecutive quarter of both categories experiencing growth. Across both categories, standout areas included Equipment spending which grew at 11.6%, as well as Software spending, which grew at 5.1%1,2
- The Unemployment Rate for the U.S. Economy is currently at a level of 3.9%. This level of Unemployment is largely considered by the Federal Reserve as representing Maximum Employment levels for the Economy1,3
- The Unemployment Rate has ticked upward since hitting multi-decade lows in the begging of 2023. Very important to note, the reason for the rise in the unemployment rate over this time is primarily attributed to new entrants to the Labor Force, not outright job loss; a sign of a healthy Labor Market,3
- The U.S. Labor Force has rebounded moderately over the past few months. The Labor Force now stands at a level of 167.7M, up from 164.5M a year ago1,3
- Upwards pressure on Wage Growth has been a key factor in driving more people to re-enter the Labor Market1,3
- However, the Labor Force Participation Ratio is largely unchanged from the start of 2022 at a level of 62.7%1,3
- The number of Employed Individuals has risen over that past year to a level of 161.2M, up from 158.5M a year ago1,3
- The number of Job Openings in the Labor Market continues to be historically high, although has moderated from the previous all-time high, now at a level of roughly 9.55M1,3
- There is now 1.46 Job Openings available for every currently Unemployed Individual1,3
- The number of Unemployed Individuals currently stands at 6.5M1,3
- Moderation in the number of Job Openings has been a key factor referenced by the Federal Reserve as a potential sign to begin Monetary Policy normalization via ceasing Rate Hikes, and potentially beginning a Rate Cut Cycle.1,3
- Average Weekly Earnings have continued to rise over the past year by about 3.2%, another sign of a strong Labor Market1,3
- Over the past year, Average Weekly Earnings increases have been entirely attributed to increases in Wage Growth as opposed to Hours Worked1,3
- Elevated Wage Growth, in tandem with consumer substitution effects, have been instrumental factors in allowing U.S. consumers to partially offset the effects of higher Inflation1,3
- Headline PCE came in at a level of 4.4% (SAAR) in the month of September, and has averaged a more normalized level of 3.4% (SAAR) throughout 20231,4
- Core Inflation also read 3.6% (SAAR) in the month of September. Throughout 2023, Core Inflation has averaged 3.50%, still slightly north of the Federal Reserve’s longer-term target of 2.0%1,4
- In recent months, volatility within Energy prices has led to larger differences between Headline and Core Inflation readings. Although, in September these differences appeared to have decreased1,4
- Throughout 2023 there have been material differences in inflationary pressures between Goods and Services, with Goods largely experiencing deflationary pressures over this time, whereas Services continue to inflate at higher levels1,4
- Goods inflated in the month of September at a pace of 2.0% (SAAR), marking the second consecutive month of inflationary pressures across Goods. In 2023, Goods inflation has been very mild, averaging just 1.70% (SAAR)1,4
- The Durable Goods section of Aggregate Goods has experienced consistent deflationary pressures in 2023 with all sub-categories generally deflating over this time. September’s deflationary reading of -1.2% (SAAR) marked the fourth consecutive month of deflationary pressures in the category. In 2023, Durable Goods has averaged deflation of -1.7% overall. Deflation within the category has been generally experienced by all sub-categories, notably Motor Vehicles & Parts which remains volatile but experienced a large drop of -9.6% in September, while averaging deflation of -0.20% in 2023. Furnishings & Household Equipment experienced deflationary pressures in September of -4.5%, while also experiencing an average rate of deflation in 2023 of -2.2%.1,4
- The Non-Durable Goods section of Aggregate Goods has experienced varied inflationary/deflationary pressures in 2023, as is customary for this sub-category due to its inclusion of Food and Energy prices. September’s reading of 3.6% (SAAR) is only slightly below the category’s 2023 of 3.8% (SAAR). A moderate degree of inflationary stability has been provided to the Non-Durable goods category from stable/deflationary effects in Food Prices. Sharply lower natural gas prices have provided for lower fertilizer and feed costs which have provided beneficial upstream input cost effects for food producers that have begun to be reflected in consumer-facing food prices. The Gasoline & Other Energy Goods sub-category has averaged an inflation rate of 26.2% (SAAR) throughout 2023, as higher upstream energy costs continue to be passed along to consumers1,4
- Services Inflation, unlike Goods, has continued to experience steady/elevated inflationary pressures over the past year. September’s reading of 5.6% (SAAR), is above that of the category’s 2023 average of 4.3%1,4
- Within Services, one major standout sub-category has been Rent Prices. September’s reading of 6.0% (SAAR) remains well elevated above historical levels. Over the past year, Rent Inflation has averaged 6.7%, and has been a primary contributor to elevated Services Inflation at the aggregate level. Important to note, while Rent Inflation is measured monthly, tenants usually only experience inflationary effects annually, therefore pricing pressure in this category may not immediately translate into lower disposable income. Another standout sub-category within Services is Public Transportation, which inflated at a robust pace of 23.9% in September, which was bolstered by an increase of 85.1% in Air Transportation prices1,4
- Market Expectations for future inflation have continued to stabilize and moderate over the past year, and are now roughly consistent with more historically normal levels5,6
- Market Expectations for future Inflation on a 5yr forward looking basis are now at a level of about 2.3%, declining consistently from the previous high of 3.5% in March 20225,6
- Market Expectations for future Inflation on a 10yr forward looking basis are now also at a level of about 2.3%, which have also declined from the previous highs achieved in March 20225,6
FORWARD LOOKING ASSESSMENT
Mithridatism – it’s not a word that you would typically find within the confines of educational material of the finance, investment, or economic variety. No, it’s more like something you would find within a cryptic ‘book of spells’ buried deep within a forgotten library belonging to a civilization long gone. Defined in a straightforward manner, mithridatism is “the practice of protecting oneself against a poison by gradually self-administering non-lethal amounts to oneself”. The practice was invented a very, very long time ago in the B.C. era by a king known as Mithradates VI as an attempt to preemptively seek immunity against poisoning attempts. Although in the modern day this is largely seen as a rather unadvisable and barbaric approach to healthcare, you could argue (and don’t worry I will) that the general concept behind mithridatism is exceptionally relevant to the current state of not only the U.S. Economy, but the financial markets as well. So, no need to fear, you are still in the right place to read about financial topics.
Let’s take a step back in time to directly after the U.S. Economy’s experience with the Global Financial Crisis. Coming out of the Great Recession, the United States was set up with a backdrop of very low interest rates, a long runway ahead of job growth, stable inflation, and the continued burgeoning of the technologies that are so often used today. Financial markets were comparatively cheap, and investors took a rather ‘slow and steady’ approach to things, as is evidenced by the Volatility Index (VIX) being on average 28% lower during the 2012-2017 period relative to the 2018-Present period. On the whole, you could absolutely describe this period of time as being rather ‘copacetic’ – or better yet… free of ‘poisons’ if you will.
Arguably, we ended our ‘poison-free’ era in 2018 by introducing our first real dose of ‘poison’ in the form of the U.S./China Trade War. Financial markets were rocked into Bear Market territory and the Economy had to deal with all the pressures of uncertainty surrounding how supply chains would react to disparate tariffs on many things (from both sides), not to mention this is when the Yield Curve first inverted, sending additional worry through financial markets. As if that wasn’t a high enough dose of ‘poison’, introduce the additional fears of an international growth slowdown, as well as continued Brexit uncertainty – that constitutes a pretty high dose. However, as high of a dose as that may be, in the following months financial markets largely shook off the worries and rallied all the way back, and the Economy hardly skipped a beat. Just like that, markets and the economy handled their first real dose of ‘poison’ in years with a sense of elegant indifference – Mithradates VI would be proud.
In a lot of ways, it might have been good that markets and the economy got their first real taste of ‘poison’ in the aforementioned era, because it set the stage for an even bigger dose in the form of the pandemic and post-pandemic era issues. There isn’t enough air capacity in anyone’s lungs to list all those problems in one breath, but I’ll give it a shot. Forced lockdowns, businesses closures, skyrocketing unemployment, shattered supply-chains, ever-changing non-uniform mandates, transitions to a ‘new normal’ way of life, and that just names a few. Again, that represents a fairly hefty dose of ‘poison’ to try and recover from; but sure enough, markets and the economy not only rebounded back – they did so in a big way. At this point, we were seriously giving Mithradates a run for his money.
Now comes our current slate of ‘poisons’. Persistently higher inflation than expected, labor supply-demand imbalances, restrictively higher interest rates, and not to mention the outbreak of 2 separate wars. Even so, while not quite ‘out of our system’ just yet, considerable progress has been made on the inflation front, while the labor market remains in a favorable state to foster beneficial wage growth – which our research shows is a strong influencer of consumer spending (the largest component of GDP). Our proprietary research also shows a strong momentum effect to consumer spending, which continues to come in at a healthy level. Being the lynchpin of the economy, a favorable backdrop such as this for the consumer likely means a favorable backdrop for most of everything else. While the effects of overseas conflicts are difficult to assess fully – note that the United States possesses the means by which to become energy independent, and that fact may therefore quell at least some of the financial market impact of those situations should further escalation arise. Additionally, future expectations of Federal Reserve policy show a general consensus that interest rates are likely to be lower the further into the future we move – a sign that has traditionally been highly correlated with actual moves in interest rates.
So, although our current slate of ‘poisons’ are still in the process of being…. processed; it is the market and economy’s acquired adaptability to adverse events that has continued to push us forward through even some of the most unthinkable, and unforeseen situations. The economy’s strength lies in the consumer, and the strength of the consumer lies in their adaptability. As far as the investing world is concerned, its unlikely financial markets will ever develop a fully functioning ‘poison resilience’, however that doesn’t mean markets have to ‘stay sick’ for long (they usually don’t). Dose by dose, over the years the world has become more resilient and more adaptive to the various array of ‘poisons’ that exist out there in the mysterious and uncertain labyrinthine of the future – stated differently, at this point, we’re kind of used to it.
Maybe this Mithradates guy was onto something….
[See Below for Disclosures & Annotations]
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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- FactSet. “Economics – Country/Region – United States”. October 26, 2023
- Bureau of Economic Analysis. “Gross Domestic Product, 3rd Quarter and Year 2023 (Advance Estimate)”. October 26, 2023.
- Bureau of Economic Analysis. “Labor Force Statistics from the Current Population Survey”. October 26, 2023.
- Bureau of Economic Analysis. “Personal Income”. October 26, 2023.
- FRED. “5-Year Breakeven Inflation Rate”. October 26, 2023.
- FRED. “10-Year Breakeven Inflation Rate”. October 26, 2023.