US GDP Data: More To It Than Meets The Eye

A sense of trepidation looms as residents on the northeastern US coast batten down the hatches in preparation for Hurricane Sandy. With storm surges expected to run at five to nine feet, low lying areas of New York City are being evacuated. US equity markets are closed for the day, as is the Nymex.

Combine this with the looming US presidential election; the once-in-a-decade power transition among the Chinese communist elite; and the disappointing Q3 corporate earning released last week from the likes of Apple, Samsung, DuPont, Ericsson and Caterpillar, and it’s no surprises that market sentiment remains decidedly “risk off”. About the only assets that gained any ground last week were the dollar and US Treasuries – the Dollar Index gaining 0.56% on the week, settling at the close of Friday at 80.07. Precious metals continue to consolidate.

Friday saw the release of preliminary Q3 GDP growth estimates for the US economy – the data surprising to the upside, with the US economy now growing at a 2% annual rate, up from 1.3% in the previous quarter. But The Washington Post’s Brad Plumer notes that government defence expenditures surged by 13% between July and August (for example, spending on ammunition doubled), because the Pentagon is keen to spend its entire budget before the fiscal year ends on September 30. This is to avoid the risk of there being excess money that it didn’t spend in a budget year, which might indicate to Congress that – shock horror – some of the Pentagon’s allotted funds weren’t really needed, and that there might be room for defence cuts in the next budget.

This pressure has been exacerbated by the looming “fiscal cliff”, and the prospect of sharp Pentagon budget cuts at the end of this year, which gives the Defense Department an added incentive to spend all it can get its hands on. A reminder of the political incentives that are driving the USA towards a fiscal abyss, as well as of the uselessness of relying on GDP as an accurate gauge of economic health.