Third Quarter GDP - My Take

Ok, GDP out this morning - everyone and their brother will be analyzing and pontificating on this, so I will leave most of it to them.  I will, instead, just focus on what I am looking at in the release.  The bottom line, in my view, is that growth is decent but not truly robust.  Numbers are no longer coming off a significantly weak base.  I am still cautious in my expectations, but not gloomy nor pessimistic. 

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $26.0 billion in the third quarter, compared with an increase of $47.5 billion in the second quarter.  Current-production cash flow (net cash flow with inventory valuation adjustment) -- the internal funds available to corporations for investment -- decreased $68.4 billion in the third quarter, in contrast to an increase of $61.1 billion in the second.

Ok, we have to expect a slowdown from the 2nd Q pace, but this is a little much.  The funds available for investment is especially troubling as cost cutting measures cannot propel growth much longer.   But the bright spot:

Domestic profits of financial corporations increased $34.6 billion in the third quarter, in contrast to a decrease of $3.4 billion in the second.  Domestic profits of nonfinancial corporations increased $0.3 billion in the third quarter, compared with an increase of $48.2 billion in the second.  In the third quarter, real gross value added of nonfinancial corporations decreased.

I am still keen on the banks across the capital structure as I do not believe risk premiums fully reflect the improvements to the business and the capital positions.  I primarily focus on the bigger banks as many of the regionals  have more work to do.  Now, with that in mind, we still have BASEL to contend with and coming regulation that could diminish trading profits and reduce profits on the retail side.

Now, for me the tricky part is deciphering the following:

The change in real private inventories added 1.61 percentage points to the third-quarter change in real GDP, after adding 0.82 percentage point to the second-quarter change.  Private businesses increased inventories $121.4 billion in the third quarter, following increases of $68.8 billion in the second quarter and $44.1 billion in the first.

 Was the inventory build in expectation of future sales or as a result of lower than expected sales?  I have to think it is a combination of the two, judging from Q3 conference calls.  Corporate leaders did not show the bubbly confidence one would expect if they were building inventories for future growth.