DAILY STRATEGY: Instead of getting caught up in distractions and worries about what drove the 3Q GDP data yesterday, let’s focus on what is happening. Productivity growth is very strong. Yes, transfer payments added to consumption, inflation COULD change next year given how strong growth is today, and the savings rate that came down a bit in 3Q. These are all legitimate concerns about how the economy might unfold in 2026. What we know today is that strong productivity growth allows for faster GDP growth with contained inflation.
Yesterday’s GDP implied exceptionally strong Q3 productivity growth. Productivity surprises tend to accrue to capital (HERE). Margin sentiment for the S&P 1500 ticked up slightly last quarter and is hovering around historical highs. That is consistent with strong productivity data. Also, strong productivity should keep inflation risk lower (happening). Booming productivity and surging profits suggest the risk of labor market problems should be low. This looks more obvious now as hiring data has stabilized. Strong productivity generally means higher real income over time. That real income would get recycled through the economy. I.e. spending data should remain firm. Holiday sales look better than expected.
Don’t Worry About the Private Sector Being Levered Up – According to yesterday’s data, the private sector financial balance* INCREASED in 3Q and is ~4% of GDP. Heading into the 2000 and 2008 recession, the private sector balance was negative (~-4% and ~-2.5% respectively). We are not sure why some investors are worried about levered households (this came up a few times yesterday) or the current savings rate being low. Net worth as a percentage of disposable income has surged and real income growth is firm. Savings rates are likely to remain low unless the economy experiences a shock.
SOURCE: BEA, 22V Research
*The domestic private sector financial balance is the difference between the fiscal deficit and the current account deficit (i.e., with the sign on the underlying balances reversed. Both are shown in the top left chart). The domestic private sector financial balance is shown in the top right chart.
A few clients noted that ex transfer payments, consumption would be weak. From the data we see, it is tough to make that argument. To be candid, we don’t really know exactly what people are measuring when they make this point. Here is what we know, as Peter Williams highlighted to us, core income – which is earned income from workers and proprietors and ex-transfer payments (social security and Medicaid) – has been firm. It is running at a ~4% growth rate on a 12-month basis and just under 6% on a 3-month basis. It dropped sharply around liberation day but has bounced back. The spending and income data is firm.
Final Demand Tracking – Real final sales to private domestic purchasers*, which is what matters most for US company earnings, rose at a 3% annualized pace. Consumption was the main driver of the GDP beat. Capex was a bit weaker. AI capex HAS NOT been the only driver of GDP. This is a point we have been over many times (HERE). The below charts highlight the trend in GDP and Real final sales to private domestic purchasers over the past 3 post recessionary cycles. Unlike the post-GFC cycle, lack of demand is not a problem this time around. Like MOST cycles, inflation is the potential constraint in this cycle. Right now, inflation is not a problem.
Source: BEA, NBER, FH calculations
Data are actual to Q3
*Real final sales to private domestic purchasers is a demand-side GDP indicator that strips out trade, inventories, and government to focus on underlying private domestic demand in the U.S. economy.
