Introduction

GDP proved very solid for a second straight quarter as the American consumer, showing strong confidence and benefiting from a robust labor market, continues to drive the economy forward and at pace. But apart from the consumer, the news is less upbeat with formerly strong sectors perhaps running out of gas and two key sectors, housing and cross-border trade, showing clear cracks.

The economy

Consumer spending is in the driver's seat, leading a solid third-quarter GDP report that, however, does raise tough but fair questions about the outlook for the economy. But first let's look at the 3.5 percent headline for the quarter, an annualized rate of growth that beat Econoday's consensus by 2 tenths. This along with the second quarter's exceptional 4.2 percent are among the very best showings of the ongoing expansion.

Highlighted by the discretionary strength of durable goods, consumer spending also beat expectations in the third quarter, at a 4.0 percent rate that outdoes the second quarter's very strong 3.8 percent showing. The graph tracks the percentage-point contribution to GDP of consumer spending which, at 2.69, exceeds the 2.50 percent line for the third time in four quarters. Without consumer spending, third-quarter GDP would have been a very subdued 0.8 percent. This strength is the best surprise of the report and, given how enormously strong demand for labor is, the outlook for consumer spending – which by the way makes up 70 percent of GDP – looks very positive.

Business investment makes up about 14 percent of GDP and it wasn't the major star as it has been in prior quarters, posting its weakest showing in nearly two years. But it was still in the plus column at 0.8 percent growth and did provide a fractional but still positive contribution to third-quarter GDP. Yet the slowdown in investment, centered in structures, is noticeable and follows growth rates of 8.7 and 11.5 percent in the second and first quarters. This may be hinting at a quick fade for the stimulative effects of this year's corporate tax cut.

Fortunately for the third quarter, residential investment makes up a very small 4 percent share of GDP, and it will be making up an increasingly smaller share at the rate it's going. Residential investment extended its dismal run, falling at a 4.0 percent rate and pulling down GDP for the fifth time in the last six quarters. This forcefully illustrates that housing is the economy's weakest sector, held down by rising mortgage rates and scarcity of materials and construction labor but also perhaps by a general lack of buyer interest. One positive for residential investment in the fourth quarter is the weakness of the third quarter which will make for an easy comparison. But going into the new quarter, housing starts and permits have been moving in the wrong direction.

One problem that may just now be unfolding is cross-border trade. The deficit in net exports widened by a very steep $99 billion in the third quarter and, by itself, pulled third-quarter GDP down by 1.78 percentage points. Whatever tariff impact there was in the quarter, whether on metals or agriculture, it didn't hold down imports which surged at a 9.1 percent growth rate. Exports were also negative for GDP posting their first contraction in 2-1/2 years at minus 3.5 percent. Like residential investment, the quarter's huge trade deficit will make for an easy comparison in the fourth quarter, but here the outlook is thickly clouded by unfolding tariff actions between the U.S. and China and risk of future actions to come. If net exports were excluded, third-quarter GDP would have been 5.3 percent.

Coming to the rescue and outmatching the negative pull from both trade and residential investment is a constructive $76 billion build in inventories which, when measured against the prior quarter, contributed 2.07 percentage points to GDP. Back in the second quarter, inventories were a major negative having been drawn down sharply and positioning the third-quarter for what proved to be a major build. Though this big gain makes a hard comparison for the fourth quarter, inventories may still be too lean and in need of further building given the strength of underlying consumer demand. Though an abstract component that is often hidden in the details, inventories provided an outsized boost without which third-quarter GDP would have come in no better than 1.4 percent.

Government purchases round out the major components, rising at a 3.3 percent clip and adding 0.56 percentage points to the quarter for one of the strongest showings of the expansion. Stimulus from government purchases is no surprise given the government's massive $4.1 trillion in annual outlays, spending which skewed the September durable goods report higher on defense orders. But how much can government spending increasingly stimulate GDP? It's up in the air but with the 2018 fiscal-year budget deficit proving to be 17 percent deeper at $779 billion, this option could be running dry.

Turning back to imports and exports, the large drag for the third quarter was confirmed the day before release of the GDP report with advance data on cross-border goods trade. September's goods gap swelled to $76.0 billion, this despite a good showing for exports that was overwhelmed, however, by a sharp rise in imports. One area where exports definitely did not improve was in foods, feeds and beverages where exports, at $11.0 billion in September, came in below imports, at $12.1 billion, for a second straight month. Food exports have been falling noticeably for four months and come amid talk that China is backing off the U.S. soybean market. This is an unfolding trade effect that may now be taking shape in the government's accounts.

One whose defining shape is increasingly clear is the slowing underway in home prices, one that offers hard confirmation of the slowdown in residential investment. The FHFA house price index proved soft as expected  with the year-on-year rate slipping 5 tenths in August to 6.1 percent. This is the lowest yearly rate since January last year. Price appreciation in the Pacific and mountain states, which was in the double digits earlier in the year, has slipped to the high single digits. The weakest region has been the mid-Atlantic, at 4.0 percent price growth in the August data. Case-Shiller data have likewise been slumping and will be a highlight of the coming week.

However much GDP has been surprising to the upside, home sales have been doing the same but to the downside. New home sales fell 5.5 percent in September to a much weaker-than-expected annualized pace of 553,000 which was far below Econoday's consensus range. Moving averages are the rule with housing data which can be extremely volatile month to month. The graph compares the 3-month average of new home sales, at 580,000 in September, with the same average for existing home sales, at 4.690 million. These are weakest averages in more than a year and the slope of the sales lines, like the slope for home prices, is unmistakable: Downward.

The building strength of consumer spending must be a source of confidence for the nation's retailers though the success of the 2018 season may not match 2017. Gallup's measure for holdiday spending is $885 per consumer which is down, not up, from last year's $906 record. A soft holiday season would not fulfill the promise of consumer spending in the second and third quarters. For those keeping score, last year's nominal spending advance for retailers during the holidays, at 6.5 percent growth, was the strongest since 2005.

Markets: Stocks in wobble, Santa Claus lonely

Gallup's holiday spending measure is probably not getting much boost from this year's stock market. The Dow is fractionally in the red so far this year compared to 18 percent of green this time last year, and the same is true of the Nasdaq, still up nearly 4 percent but compared to a 23 percent year-to-date surge in late October 2017. The week started off on a down note but it wasn't until Tuesday, following heavy overnight losses in Chinese markets, that October's wobbles returned. The Dow opened 2 percent lower on Tuesday but battled back to trim the loss to only 0.5 percent by the close. Then Wednesday hit with a 2.4 percent tumble for the Dow and a 4.4 percent crumble for the Nasdaq, its steepest loss in seven years. Thursday saw another fight back but then another capitulation on Friday. Yes, October is often be a bad month for the stock market unlike December which, thanks to a predictable year-end Santa Claus rally, often proves a very good month. And it will probably have to be a very very good December to bail out this year's stock market. Unlike stocks, bonds and the dollar were steady in the week with demand for both on the rise. If this is flight to safety, it's not helping gold much which managed only a 0.6 percent gain and still is no higher than $1,235 for a 5.3 percent year-to-date loss.

The bottom line

For the Federal Reserve, the upshot of strong GDP and strong consumer spending is the risk of overheating and sudden acceleration for inflation. But there's not much evidence of the latter. The GDP price index came in at only 1.7 percent in the third quarter. This missed the consensus by 3 tenths for the most subdued result since second-quarter last year. But the Fed is set on its rate-hike path making for higher mortgage rates, which won't be helping housing, and for likely strength in the dollar, which would be a further negative for trade.

Week of October 29 to November 2

Wednesday's employment cost index (ECI) and Friday's employment report are the coming week's highlights. They will update the two central factors for Federal Reserve policy: wage inflation and the labor pool. Monday's personal income & outlays report will unbundle September's data from the prior week's GDP results though PCE inflation data, however subdued, always get attention. Housing news takes a breather in the week with the exception of Tuesday's Case-Shiller report where limited gains are the expected news for home prices. The Conference Board's consumer confidence index will also be posted Tuesday and extended  optimism, at historic levels, has been the routine outcome. Wednesday's highlight will be the third-quarter ECI, a report that gets special attention at the Fed and which has been showing increasing costs for labor. An upward surprise in the ECI could easily unhinge rate-hike concerns. Labor costs relative to output will be the theme of third-quarter productivity and costs, a report that is expected to show strength following the third-quarter GDP report. Routine strength is always the call for ISM manufacturing which follows on Thursday as does construction spending where surprises could affect GDP revision estimates. And any surprises in Friday's international trade report could also affect those estimates. But third-quarter revisions will soon be forgotten ahead of the October employment report. Any further draining of the labor pool tied to strong employment growth could easily deepen rate-hike worries, as could average hourly earnings which aren't expected to show much monthly pressure though the year-on-year rate is suddenly seen above the 3 percent line.

Monday

Personal Income for September

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.5%

Consumer Spending

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.2% to 0.5%

PCE Price Index

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.1% to 0.2%

PCE Price Index

Consensus Forecast, Year-on-Year Change: 2.0%

Consensus Range: 2.0% to 2.3%

Core PCE Price Index

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.1% to 0.2%

Core PCE Price Index

Consensus Forecast, Year-on-Year Change: 1.9%

Consensus Range: 1.9% to 2.1%

Personal income is seen rising a solid 0.4 percent as is consumer spending in September (note the report will unbundle September's contribution from last week's third-quarter GDP report). The core PCE price index, which excludes both food and energy, is seen posting a very subdued 0.1 percent monthly rise for a year-on-year gain of 1.9 percent and back below the Federal Reserve's 2.0 percent policy target. The core, which is the most closely watched of all inflation readings, first hit the Fed's 2 percent goal in March before edging to 1.9 percent in subsequent reports and then returning to 2.0 percent in July and August. The consensus for the overall PCE price index is also a 0.1 percent gain for a year-on-year rate of 2.0 percent.

Dallas Fed General Activity Index for October

Consensus Forecast: 28.0

Consensus Range: 25.0 to 29.0

A steady and strong rate of growth is what forecasters see for the Dallas Fed's general activity index. The consensus for October is 28.0 vs 28.1 in a September report that, though very strong, did show signs of welcome cooling in a region where overheating is a risk.

Tuesday

Case-Shiller, 20-City Adjusted Index for August

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.0% to 0.3%

Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Year-on-Year Change: 6.0%

Consensus Range: 5.7% to 6.0%

Not only has FHFA price-growth been slowing, but Case-Shiller has been sagging noticeably as well with July's 20-city adjusted index managing only a 0.1 percent gain and with the year-on-year unadjusted rate at 5.9 percent for the softest showing since August last year. For August this year, Econoday's panel is calling for only a 0.2 percent monthly gain and a year-on-year rate of 6.0 percent.

Consumer Confidence Index for October

Consensus Forecast: 136.0

Consensus Range: 133.0 to 138.0

How high can the consumer confidence index go? After surging to an 18-year best of 138.4 in September and within striking distance of the all-time record at 144.7, forecasters see October's index slipping, but only slightly to 136.0. One of the few negatives in the last report was an increase in jobs-hard-to-get which correctly forecast what proved to be slight slowing in September's payroll growth.

Wednesday

ADP, Private Payrolls for October

Consensus Forecast: 180,000

Consensus Range: 155,000 to 200,000

Econoday's consensus for ADP's private payroll estimate in October is 180,000 which would compare with 230,000 for ADP's September estimate and against 121,000 in the government's data for September.

Employment Cost Index for 3rd Quarter

Consensus Forecast, Quarter-to-Quarter Change: 0.7%

Consensus Range: 0.5% to 0.8%

Increasing pressure is expected for the employment cost index with Econoday's consensus at a 0.7 percent rise in the third quarter compared to 0.6 percent in the second quarter. The year-on-year rate in the second quarter, at 2.8 percent, was the highest in 10 years in what was a strong signal of wage pressures in the labor market.

Chicago PMI for October

Consensus Forecast: 60.0

Consensus Range: 58.0 to 61.1 

Steady strength at a strong level is the call for the Chicago PMI with the October consensus at 60.0 vs 60.4 in a September report that showed slowing in new orders and also production but a build in backlogs. Hiring in the sample was flat.

Thursday

Initial Jobless Claims for October 27 week

Consensus Forecast: 212,000

Consensus Range: 209,000 to 215,000

Hurricane Michael proved to have very little effect on jobless claims which have remained at historic lows. Initial jobless claims are expected to come in at 212,000 in the October 27 week vs 215,000 in the prior.

Nonfarm Productivity, 1st Estimate, 3rd Quarter

Consensus Forecast, Annualized Rate: 2.2%

Consensus Range: 1.8% to 2.6%

Unit Labor Costs

Consensus Forecast, Annualized Rate: 1.2%

Consensus Range: 0.4% to 2.0%

Forecasters are looking for respectable growth of 2.2 percent in third-quarter nonfarm productivity vs a strong 2.9 percent increase in the second quarter. Unit labor costs in the second quarter, reflecting the rise in productivity, fell 1.0 percent and a rise of 1.2 percent is the third quarter's call.

PMI Manufacturing for October Final

Consensus Forecast: 55.9

Consensus Range: 55.4 to 55.9

Boosted by production and employment, PMI manufacturing firmed in the October mid-month flash after posting solid growth in September. No change is expected for October's final with Econoday's consensus at 55.9. This index ended September at 55.6.

ISM Manufacturing Index for October

Consensus Forecast: 59.1

Consensus Range: 58.0 to 60.3

Steady strength at a very high level is what Econoday's forecasters see for the October ISM manufacturing index where the consensus is 59.1 vs 59.8 in September that came in right at expectations. Growth in new orders cooled in the prior report but remained very strong while production and employment both picked up speed.

Construction Spending for September

Consensus Forecast, Month-to-Month Change: 0.3% 

Consensus Range: -0.2% to 0.8%

Forecasters do not see much of a bounce for construction spending in September which has been very soft in recent reports. Econoday's consensus is a 0.3 percent gain vs only a 0.1 percent increase in August, a month when both residential and private nonresidential spending was weak.

Friday

Nonfarm Payrolls for October

Consensus Forecast: 190,000

Consensus Range: 150,000 to 231,000

Unemployment Rate

Consensus Forecast: 3.7%

Consensus Range: 3.6% to 3.8%

Private Payrolls 

Consensus Forecast: 181,000

Consensus Range: 160,000 to 200,000

Manufacturing Payrolls 

Consensus Forecast: 14,000

Consensus Range: 10,000 to 22,000

Participation Rate

Consensus Forecast: 62.8%

Consensus Range: 62.6% to 62.8%

Average Hourly Earnings

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.4%

Average Hourly Earnings

Consensus Forecast, Year-on-Year Change: 3.1%

Consensus Range: 2.8% to 3.2%

Average Workweek

Consensus Forecast: 34.5 hours

Consensus Range: 34.5 to 34.5 hours

A 190,000 rise in nonfarm payrolls is Econoday's consensus for the October employment report with the unemployment rate seen holding at September's 49-year low of 3.7 percent. Average hourly earnings are expected to rise a modest 0.2 percent on the month with, however, the year-on-year rate expected to jump 3 tenths to 3.1 percent. Private payrolls are seen rising 181,000 with manufacturing payrolls expected to increase a solid 14,000. The workweek is seen unchanged at 34.5 hours with the labor participation rate up 1 tenth to 62.8 percent.

International Trade Balance for September

Consensus Forecast: -$53.4 billion

Consensus Range: -$58.4 to -$51.0 billion

After narrowing sharply through the second quarter, the trade deficit rose sharply in the first two months of the third quarter and another deep deficit is expected for September. Based on advance data for the goods portion of the trade report, forecasters see the September international trade balance at a consensus deficit of $53.4 billion. This would compare with a $53.2 billion deficit in August and a monthly average deficit of $44.8 billion in the second quarter.

Factory Orders for September

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: -0.9% to 0.6%

Advance data for the durables side of the September factory orders report showed a solid 0.8 percent rise at the headline level, one boosted by defense aircraft, but also another weak month for core capital goods. Forecasters see factory orders in September, which will include initial data on non-durable goods, rising 0.4 percent.

Total Unit Vehicle Sales for October

Consensus Forecast, Annualized Rate: 17.0 million

Consensus Range: 16.8 to 17.2 million

Vehicle sales had been flat before rising strongly in September. The consensus for October unit vehicle sales is a 17.0 million rate vs 17.4 million in September, a result that would lower the outlook for the motor vehicle component of the monthly retail sales report.