Last week, third-quarter Gross Domestic Product (GDP) was reported to grow by 2.5 percent annualized, meeting or beating most analysts’ expectations. This was a strong improvement from second-quarter growth of just 1.3 percent.
According to the Bureau of Economic Analysis, the increase was a result of positive contributions from personal consumption expenditures, nonresidential fixed investment, exports and federal government spending that were partly offset by negative contributions from private inventory investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.
We have seen a steady progression of increasing GDP growth in 2011, starting with the first quarter, which showed an increase in GDP of only 0.4 percent annualized. But does this signal a return to more robust growth, or can we expect to see GDP slide in the fourth quarter and beyond?
Much has been written about the possibility of a “double-dip” recession (I’ve written about it myself) — one recession followed in short order by a second, usually more severe recession. While the global debt situation and struggling economies around the world certainly give us pause, it appears, especially with this most recent GDP report, that another recession is far less likely.
The fourth quarter will be interesting. FedEx just last week announced it would be hiring 20,000 seasonal employees to help with the holidays — an indication that it believes holiday sales will be strong. However, we also saw Whirlpool announce 5,000 layoffs and cut its earnings outlook, while several other companies reduced their forecasts for the fourth quarter and for 2012. Both ExxonMobil and Chevron Texaco had blowout earnings in the third quarter.
Stocks overall, which closed flat Friday, are on track to complete their best October ever after a deal among European leaders was reached Thursday to help solve the eurozone’s sovereign debt crisis. The Standard & Poor’s 500 Index closed Friday at 1,285, gaining 3.8 percent for the week. The Dow Jones Industrial Average rose 3.6 percent for the week, and the Nasdaq Composite Index added 3.8 percent for the week.
The S&P 500 is up 154 points so far in October, with one day of trading remaining, or by 13.6 percent. To date, the Dow is up 1,318 points, or 12 percent, and the Nasdaq gained 322 points, or 13.3 percent, for the month.
Looking ahead to the fourth quarter, the holiday season will be a key factor in the performance of the economy and the stock market. If holiday sales are strong, earnings for companies, especially retailers, should also be strong. As we begin to get early indications of holiday sales volumes, stocks should react to the information, which in turn will affect both consumer and investor behavior.
My feeling is that this is going to be a strong holiday season. Consumers are tired of holding back on purchases, and many people have put off buying things they really need because of the weak economy. Personal savings have improved as consumers have cut back, leaving them with more money to spend. The holidays provide a good excuse to pull the trigger and buy the things they have been wanting or needing.
Personal incomes, reported last week, were up a dismal 0.1 percent, but at least they were not down. The monthly employment number is due this week, and assuming we don’t get a terrible number, we should be able to look past the day-to-day negativity we have been experiencing — especially with regard to the European debt crisis — and begin to look ahead to better times.
My belief is that 2012 will still be challenging, but that consumers and to a larger extent investors will begin to look even further ahead, to the elections late in 2012 and to 2013 especially, as the time when the economy will really pick up steam and begin to show signs of a more pronounced recovery. I feel that we will start to see real gains in new jobs by 2013, and that GDP growth will return to the plus-3 percent level. Real estate prices should be bottoming by 2013, and although the bottoming process will likely take a few years, the fact that real estate prices and activity will not be declining should get buyers off the fence — to stop waiting for lower prices before they are willing to commit.
All in all I feel the future looks a bit brighter than it did only a few months back. We are certainly not out of the woods yet, and the problems in Europe have certainly not been solved. However, progress is being made, companies are starting to spend money and consumers seem to be gaining confidence (despite the worst consumer confidence report since the depths of the most recent recession in early 2009 reported last week). Only time will tell, but the latest GDP report is somewhat encouraging, and I look forward to seeing the results of the holiday season with cautious optimism.
— Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at craig@craigdallen.com or 805.898.1400. Click here for previous Craig Allen columns. Follow Craig on Twitter: @MPAMCraig.