You hear a lot about “risk on” and “risk off” by the media to describe the day-to-day short term volatility. For example, in the third quarter the S&P 500 fell 13.87%, clearly a “risk off” quarter. Then in October, as of Friday the 28th the S&P had increased by 13.74%, clearly a “risk on” month. At the end of all this, the S&P was actually up by 3.87% so far for the year.
The last four months have been a roller coaster ride but it’s important to maintain an intermediate and long term perspective in order to invest in the right areas. With that in mind, we took a deeper look at the advanced real GDP numbers. According to the BEA and based on the advanced estimate numbers, the US Economy increased by 2.5% in the third quarter. This number was in line with consensus and better than the first two quarters of the year.
Looking deeper into the GDP numbers, you can see that third quarter was clearly a “consumption on” quarter when compared to second quarter:
| GDP Component | Q3 2011 | Q2 2011 |
| Personal Consumption | +2.4% | +0.7% |
| Durable Goods | +4.1% | -5.3% |
| Nonresidential Fixed Investments | +16.3% | +10.3% |
| Equipment and Software | +17.4% | +6.2% |
I would say this is better than another “inventory rebuild” quarter, but we are still not out of the woods until we see wage inflation. “Consumption on” is much better than “consumption off”, but we need to make sure it’s sustainable consumption.
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Hat tip to the Dismal Scientist for the spending graph