The outlook for fourth quarter GDP improved markedly after November’s strong retail sales, and some economists say growth could reach 3 percent for a third quarter in a row for the first time since 2005.
Natixis economist Joseph LaVorgna says it could even hit 4 percent — a target the White House expects to see after tax reform kicks in. But LaVorgna said the fourth quarter is showing signs of strength beyond the retail sales, which rose 0.8 percent, more than double expectations and by some measures a more than decade high.
“You had a tremendous jump in aggregate hours, in the jobs report. You’re running at an almost 3 percent annual rate. With any increase in productivity, you’re at 4 or 5 percent GDP” growth, he said. LaVorgna said November’s 7.2 percent annualized increase in control retail sales, minus food, energy and building materials, was the best since fourth quarter 2005.
Economists in the CNBC/Moody’s Analytics Rapid update survey of economists raised their tracking estimate for fourth quarter GDP by an average 0.3 percent to an average 2.7 percent. The range of forecasts was between 2.4 percent and 3.7 percent.
The Atlanta Fed’s GDPNow forecast jumped to was for 3.3 percent from 2.8 percent. It said its forecast for fourth quarter real consumer spending growth increased to 3.2 percent from 2.5 percent after Wednesday’s consumer price index report and Thursday’s November retail sales.
Three percent is the type of growth President Donald Trump has discussed for this year, and he got it in the second and third quarter, with the fourth quarter now possible. It would be the first time three back-to-back quarters were three percent or better since the third quarter of 2004 through the first quarter of 2005.
“Admittedly, it’s still relatively early in the GDP tracking process, but today’s report increases the chances that overall GDP could print another 3 percent-handle in Q4 [after back-to-back [3 percent plus] in the prior two quarters],” wrote Michelle Girard, chief U.S. economist at NatWest Markets.
But LaVorgna said the fourth quarter could be even stronger, and if it comes in at 4.6 percent then Trump would have a 3 percent year. But the president’s new bar now appears to four percent.
“So we’re at 3.3 percent GDP. I see no reason why we don’t go to 4 percent, 5 percent and even 6 percent,” the president said recently. The administration has predicted 4 percent growth with tax cuts.
LaVorgna said four percent growth will be hard to achieve next year. “Maybe we can get to 3 percent,” he said, adding that labor growth could be constrained unless people return to the labor force.
“At the same time productivity has to increase…3 [percent] would be the natural limit, as to where growth would be,” he said. “Next year will be a good year for growth, at least relative to previous years.”
LaVorgna said it’s not clear the tax bill will add to growth. “A third of the country is going to have a very big tax hit because of this,” he said. “…The problem is going to be trying to find the reason for growth. Is it the tax cut or the animal spirits from the business cycle?”
Not all firms are see GDP at the 3 percent threshold for the fourth quarter. Goldman Sachs economists raised their tracking estimate for fourth quarter by 0.2 to 2.5 percent. JP Morgan economists said the retail sales strength suggest their could be upside risk to their 2.5 percent estimate.