The U.S. economy grew 3.5% in Q3 based on the advanced reading. This was down from the 4.2% rate in Q2, but it was ahead of the 3.2% estimate. Consumer spending increased 4%, offsetting the 7.9% plunge in business spending. Inventories added 2.1% to growth while trade shaved off 1.8%. The PCE and Core PCE indices both rose at an annual rate of 1.6% in Q3, down sharply from the 2.1% rate registered in Q2. Economists expect 3% GDP growth in Q4.
While one jobs report shouldn’t be scrutinized too closely, the jump in average hourly earnings could be the start of long awaited “wage pressure”. The report was quite strong with 250,000 new jobs added to the economy and an unemployment rate that held steady at 3.7% (lowest since 1969). The headline figures were well ahead of estimates and the labor participation rate ticked up 0.2% to 62.9%. There were no significant revisions to August and September and the broader U6 unemployment rate edged lower to 7.4%. The bigger story was wage growth, which has been the missing piece of the economic recovery. Wages increased 3.1%, the best since 2009. Higher wages may pressure the Fed to raiserates at a more aggressive pace to keep inflation under control. Wage growth has historically led to a recession near the 4% level. Midterm election night failed to produce any real fireworks. As predicted, the Democrats regained control of the House (32 seat gain thus far) and the GOP maintained and extended their margin in the Senate (2 seat gain thus far). Gridlock is expected and there will likely be nothing significant accomplished over the next two years. There does appear to some common ground on infrastructure and prescription drug prices, but tax reform 2.0 is now dead. This was essentially a check on Republicans’ power over the past two years and hopefully both sides can figure out a way to move the country forward. Under the scenario of a Republican President, a Democratic House and a Republican Senate, the average calendar year return for the S&P 500 since 1933 has been 10.8%.