Election outcome and prediction markets

http://www.intrade.com

Sophisticated prediction analysis:

http://money.cnn.com/2012/11/07/news/companies/nate-silver-election/index.html


http://www.ritholtz.com/blog/2012/11/nate-silver-and-the-lessons-of-2012/

http://fivethirtyeight.blogs.nytimes.com/2012/11/01/oct-31-obamas-electoral-college-firewall-holding-in-polls/

Oct. 31: Obama’s Electoral College ‘Firewall’ Holding in Polls

By NATE SILVER

On Oct. 11, this blog posed the question of whether President Obama’s “firewall” in battleground states was all that it was cracked up to be.
At that point, Mr. Obama still technically held the lead in the FiveThirtyEight forecast in enough states to give him 270 electoral votes. But Colorado, Florida and Virginia had turned red in our map, meaning that our forecast suggested that Mitt Romney had better-than-even odds of winning them. Iowa was just on the verge of doing so. And Mr. Obama’s lead was down to just a percentage point or so in Ohio, which would have collapsed his firewall at its foundation.
Theories that the decline in Mr. Obama’s polls that followed the first presidential debate in Denver would somehow skip the swing states were not looking good — as dubious as the idea that tornadoes “skip” houses.
Instead, at that point, Mr. Obama’s position in the FiveThirtyEight forecast had declined for seven consecutive days. If he stopped the bleeding there, he might still be the Electoral College favorite, albeit a narrow one. But it wasn’t clear where the bottom was.
It turned out, however, that the worst was almost over for him. Mr. Obama had one more terrible day in the polls, on Friday, Oct. 12, when Mr. Romney’s chances of winning the Electoral College rose to almost 40 percent in the forecast. But that was when Mr. Romney’s momentum stopped.
Since then, Mr. Obama’s standing has rebounded slightly. His position in the national polls has stabilized; although the national polls continue to tell a different story about the race than the state polls do; it can no longer be said that they have Mr. Obama behind. (More about that in a moment.)
Meanwhile, Mr. Obama continues to hold the lead in the vast majority of polls in Iowa, Nevada, Ohio and Wisconsin, the states that represent his path of least resistance toward winning the Electoral College. This was particularly apparent on Wednesday, a day when there were a remarkable number of polls, 27, released in the battleground states.

There were 12 polls published on Wednesday among Iowa, Nevada, Ohio and Wisconsin. Mr. Obama held the lead in 11 of the 12 surveys; the exception was a survey by the University of Iowa, which had Mr. Obama down by about one point there, but also had a very small sample size (about 300 likely voters). On average, Mr. Obama led in the polls of these states by 3.9 percentage points.
None of this ought to have been surprising, exactly, if you have been attentive to the polls rather than the pundits. It was a pretty good day of surveys for Mr. Obama but not a great one: for the most part, the polls were coming in close to FiveThirtyEight forecasts in each state, give or take a modest outlier here and there.
Rather, the polls in these states confirmed what we already knew: that Mr. Obama remains the favorite in the Electoral College.
Mr. Obama is not a sure thing, by any means. It is a close race. His chances of holding onto his Electoral College lead and converting it into another term are equivalent to the chances of an N.F.L. team winning when it leads by a field goal with three minutes left to play in the fourth quarter. There are plenty of things that could go wrong, and sometimes they will.
But it turns out that an N.F.L. team that leads by a field goal with three minutes left to go winds up winning the game 79 percent of the time. Those were Mr. Obama’s chances in the FiveThirtyEight forecast as of Wednesday: 79 percent.
Not coincidentally, these are also about Mr. Obama’s chances of winning Ohio, according to the forecast.
Regular readers will have seen the chart below once or twice before. It sorts the competitive states in order of Mr. Obama’s current projected margin of victory or defeat in each one, keeping a running tally of the number of electoral votes that Mr. Obama is accumulating.

Ohio remains the tipping-point state in the forecast, the one that puts him over the top to 270 electoral votes. There, Mr. Obama leads by 2.6 percentage points, which should convert to a victory about 80 percent of the time given the historical accuracy of polls at this late stage of the race.
Mr. Romney’s chances of winning the Electoral College without Ohio — a prospect we had defended as being plausible before — are looking more tenuous based on the most recent polling.
If Mr. Obama wins Ohio, and all the states above it on the chart, he’d have 281 electoral votes, meaning that he has 11 to spare. That means he could shed New Hampshire from his list, along with either Iowa or Nevada (although not both).
Of these two states, Nevada appears to be the slightly safer one for Mr. Obama; there, Mr. Obama leads by 3.5 percentage points in the forecast, as opposed to 2.9 percentage points in Iowa. The polling has also been somewhat more consistent in Nevada than in Iowa, another factor that the forecast considers in evaluating the probability of an upset.
One fortunate aspect of these two particular states, from Mr. Obama’s view, is that they are not very similar to one another demographically.
Iowa is quite rural. Nevada occupies a huge geographical territory, but its population is very urban, mostly living in Las Vegas and its suburbs.
Iowa is overwhelmingly white, and has a lot of moderate and middle-income, but highly educated, voters. Nevada certainly has an independent streak, but winning there usually depends more upon building a 50 percent coalition among diverse groups and then turning it out to vote. Iowa has a pretty good economy, all things considered; Nevada’s is still terrible.
Since Mr. Obama only needs to carry one of these states, it helps him that they form a diverse portfolio. If Mr. Obama’s turnout operation is strong, then Nevada should be one of the states where he benefits the most. If, instead, Mr. Obama has little “ground game” advantage, but he holds his own among independent and undecided voters, perhaps persuading them that the economy has improved enough to merit his re-election, Iowa may fall for him.
Mr. Romney could also circumvent his need to win Ohio by carrying Wisconsin, but that is looking tough for him. In Ohio, Mr. Romney is behind by two or three percentage points, on average, in the polls. In Wisconsin, Mr. Romney’s better polls have him down by two or three points, while his worst ones have him six to eight points instead. There’s still enough upside to winning Wisconsin that Mr. Romney should not give up on it, in my view, but his chances are down to 12 percent in the forecast, and most of those cases involve outcomes where he has already won Ohio anyway.
The more debatable cases are Pennsylvania, Michigan and Minnesota. Mr. Romney is the clear underdog in each one. But his campaign has so much money that it probably doesn’t hurt Mr. Romney much to spend a little bit of it there to maximize whatever residual chances he might have in case the polls are wrong. (Arguably, it was a poor strategic decision for Mr. Romney to make a half-hearted effort to compete in these states.)
Still, for Mr. Romney to win Michigan, Minnesota, or Pennsylvania, the polls would have to be much further off than they are in Ohio.
It doesn’t help Mr. Romney, either, that all of these states are in the same part of the country as Iowa, Ohio, and Wisconsin, meaning that they are unlikely to leapfrog them and become the tipping-point state on Tuesday. If, hypothetically, Mr. Romney’s polling were a bit better in culturally and geographically disparate states, like Oregon, New Jersey or New Mexico, they might represent better targets.
If Mr. Obama were to lose Ohio (but hold the other states), the tipping-point would then become Colorado. There, Mr. Obama holds a much more tenuous lead, about one percentage point in our forecast, which converts to about a 60 percent chance of winning. But at least it’s a lead rather than a deficit, whereas Mr. Romney’s non-Ohio paths would require him to win states where he is now three or four percentage points behind.
Mr. Obama also remains about a 60 percent favorite in Virginia. Another option would be Florida, although it is a resource-intensive state and we give him about a 40 percent chance of winning there.
While state polls dominated the news on Wednesday, there were also a handful of national polls out, even as others have been suspended in the wake of Hurricane Sandy.

On average, Mr. Obama led by just over one percentage point in these national polls, although it is an odd distribution, with two polls showing him up by four or five points, several showing a tied race, and one (the Rasmussen Reports tracking poll) putting him two points down.
The FiveThirtyEight model calculates a national poll average, using a more sophisticated method than the simple average I’ve taken in the chart. (The model doesn’t “forget” about the Gallup poll, for example, just because it has been suspended for a couple of days.)
We don’t usually print this number, because it would sow confusion: our estimate of the national popular vote, which we do publish, instead represents a combination of national polls and the implied standing of the candidates based on state polls.
But, for what it’s worth, our national poll average shows Mr. Obama up by about half a percentage point right now. This is within the range of other Web sites: Real Clear Politics has an exactly tied race in its national poll average; HuffPost Pollster has Mr. Obama down by three-tenths of a point; Talking Points Memo has Mr. Obama ahead by about one percentage point.
Again: we don’t take the average of the national polls to be tantamount to a forecast of the national popular vote, since state polls, if considered carefully, can provide considerable information about the national race as well.
Suppose, however, that Mr. Obama were to tie Mr. Romney in the popular vote on Tuesday. The way that the forecast model works, this would require subtracting some from Mr. Obama in each state in order for the arithmetic to add up.
Even under these conditions, Mr. Obama would still be a favorite in the forecast. In fact, he’d be about a 70 percent favorite to win the Electoral College conditional upon the national popular vote being tied, according to our simulations.
A tie in the national popular vote is a tolerable condition for Mr. Obama, in other words. His position is robust enough in states like Ohio that he has some slack. With a lead of about 2.5 percentage points in the tipping-point states, Mr. Obama could underperform his state polls by a point or two and still win.
Conversely, Mr. Romney has few chances to win unless the state polls are systematically wrong.
I don’t mean for this to sound dismissive; the polling error could quite easily be correlated across the different states, and the national polls are one reason to be suspicious of the state polls.
But we’re at the point now where Mr. Obama may be a modest favorite even if the national polls are right. Two weeks ago, when Mr. Obama appeared to trail Mr. Romney by a point or so in the national polls, that would not have been the case.
Is it possible that Mr. Obama has benefited, politically, from his handling of Hurricane Sandy? He has gotten high marks for it so far, according to the tracking poll run by The Washington Post and ABC News.
Our database contains roughly a dozen polls that conducted the bulk of their interviews on Tuesday or Wednesday, after Hurricane Sandy became the dominant news story. Most of these are state polls, and most were conducted in states that were isolated from the major effects of the storm.
Our analysis of the trend lines in the polls suggest that they have been a somewhat above-average group for Mr. Obama, perhaps suggesting a percentage point or so of improvement for him.
The model is not yet pricing in very much of this into its forecast, as trends like that can occur fairly easily because of statistical noise. But if the storm has a discernible effect in the polls, it seems more likely to help Mr. Obama than to hurt him based on what we’ve seen so far.
This is something to monitor as more national polls come back online. I think describing the race as a “toss-up” reflects an uninformed interpretation of the evidence, but there is surely room to debate how much of a favorite Mr. Obama is. However, Mr. Romney is not in a position to tolerate any movement in Mr. Obama’s favor given how close we are to the finish line.

An Investor’s Guide to the Presidential Elections

http://www.ritholtz.com/blog/2012/11/investors-guide-to-elections/

An Investor’s Guide to the Presidential Elections

Posted By Barry Ritholtz On November 5, 2012 @ 7:00 am In Investing,Markets,Podcast | 3 Comments

The most important election of our time! The fate of the free world hangs in balance! Yadda yadda yadda!
Every four years, the usual clichés comes out. I suggest you ignore them, and instead focus on the policies that are unambiguously different,  and have very different outcomes.
More specifically, between the policy pronouncements madde by candidates Barack Obama and Mitt Romney, what are the key differences in these policies that affect investors directly?
Asked differently, what does the outcome of the Presidential election mean for the investing public? I refer not to things that impact investors indirectly, like estate or income tax brackets; rather, what  are the  specific areas of significant disagreement, where substantial policy differences exist, and where the candidates’ different approaches have a meaningful impact on investors.
These include:

1. Sectors: In particular, Energy, Healthcare, Defense Policy
2. Federal Reserve Philosophy and Appointments (re: Interest rate policy)
3. Investment Taxes (Dividend Treatment/Capital Gains Taxes)
4. Regulatory Approach / Legal

Before we begin, a caveat: What the candidates say and what they can and will actually accomplish are often two different things. I have no idea what policies either OObama or Romney as President will manage to get through Congress. What we are looking is the impact of their stated policies if enacted.

1. Let’s begin with a sector analysis. Three key areas where the policies of the candidates are so significantly different that the stocks in these sectors have begun to shift with the polls. They are Energy, Healthcare, and Defense.
Energy, a victory by Governor Romney will work to the benefit of Coal, Pipelines, and the Oil sub sector known as Exploration & Drilling. President Obama has been much friendlier to Wind, Solar and Electric Vehicles.
Romney would be a much easier administration in terms of allowing more drilling and exploration, especially in Alaska and on other public lands. Obama has been more environmentally protective. However, the President has been far friendlier to “Big Oil” than most of his supporters expected.
Ethanol: Neither candidate has committed to discontinuing Ethanol, a giant subsidy to Iowa farmers that has us burning food and befouling engines for no damned good reason.
One final energy note: Neither candidate has been especially aggressive about charging Oil or Mining companies full carry price for crucial resources they extract from public lands. Compared to nations like Norway, we grant licenses to the private sector far too cheaply. It would generate enormous revenues and help close the deficit if we charged closer to fair value for these assets than we do; instead, we subsidize these industries with giant giveaways at the taxpayers expense.
Healthcare probably has the starkest comparison between the two candidates. Under Obama, Insurers and Hospitals are likely to do well. Obamacare guarantees health insurance to millions of people who otherwise would not have coverage. This creates lots of new paying customers for the insurers (either privately or through the government); Emergency rooms will no longer act as free walk in clinics at Hospitals – their accounts receivable will improve immeasurably.
As far as big Pharma, I don’t see much of a difference. There is a possibility that a win by Romney could crimp stem cell research (again), but its less clear under Romney than under Bush how the research would fare.
Defense is simple: A Romney victory means more major weapons program purchases. A Romney win means you should look at the big providers of weapons systems, especially naval and aircraft manufacturers.
Finance: As much as Wall Street and big Banks are angry at Obama, he has been rather accommodating to them. I don’t see much of a difference between either candidate for finance, other than the tax loophole giving friendlier treatment of carried interest for hedge fund and private equity managers. (Obama would repeal it, Romeny would keep it). There has been some signs of Obama getting tougher on banks, suing Bank of America for its fraudulent mortgage underwriting. Relative to these other two sectors, however, there is only a small difference between the two when it comes to Wall Street. (see section on Regulations for greater differences)
For a list of companies in all of these sectors, see the Yahoo Finance Industry Browser (http://biz.yahoo.com/p/ ^[1])
~~~
2.  Federal Reserve: There is an enormous sated difference between the candidates when it comes to their announced policies and philosophies regarding the Federal Reserve.
Governor Romney has stated he is against quantitative easing (QE) and Zero Interest Rate Policies (ZIRP) of the past 5 years. He has stated he would not reappoint Ben Bernnake (who may be stepping down in 2014 regardless).
Some anaysts have noted that stock markets have been riding on a Fed induced sugar high. Jim Bianco, chief strategist at Bianco research, notes that the most recent market turmoil began after the first debate. Obama’s poor performance improved the odds of a Romney victory. After trailing badly in the polls, the possibility of a Romney appointed Fed chief, according to Bianco, spooked the markets who have become “addicted to an easy Fed.”
Romney is more likely to appoint a Fed chief who will normalize interest rates, and stop the extraordinary accommodations the Federal Reserve has provided to the capital markets.
Current Fed chairman Ben Bernanke has suggested he would step down when his term is up in Some of the names circulated as possible replacements by Romney have been John Taylor of Stanford and Glenn Hubbard of Columbia.
Addendum: We don’t know who will be Treasury Secretary (or other related positions) but we can assume these appointments will be similar philosophically to Fed appointments.
The president selects his Treasury Secretary, the head of the Council of Economic Advisors, along with other positions that can have a big impact on how policy gets executed. Important under normal circumstances, it becomes crucial during crises.
~~~
3. Investment Related Taxes
Obama versus Romney, Investor Related Positions

Policy	Obama	Romney
Dividend Taxes	Maintain current 0% and 15% tax rates on qualified dividends	Would maintain the current 0% and 15% rates on qualified dividends
Capital Gains Taxes	Maintain current 15% tax rates on long-term capital gains for couples with income under $250,000 (singles under $200,000); Over those incomes, taxes go to 20%	Would eliminate tax on capital gains, dividends and interest income for any taxpayer with adjusted gross income below $200,000
HealthCare Tax	Would maintain the additional 3.8% Medicare tax included in the health care act on investment income.	Would repeal the 3.8% Medicare tax on investment income (as a result of repealing the health care act).
Municipal Bond Taxes	Would cap the tax benefit of municipal interest at 28%, effectively creating a tax of 8% or 11.6% for those in the top two tax brackets	No change in tax treatment
Corporate Tax Rates	Cut corporate tax rate from 35% to 28%; Would target oil and gas companies for higher taxes, would offer tax breaks for manufacturers	Cut them from 35% to 25%; Move to a territorial system, rather than taxing corporations on income earned overseas
Corporate Tax Deductions	Would ban unspecified tax deductions	Would eliminate unspecified tax loopholes

Sources: Dollarwise ^[2], Forbes ^[3], Presidential campaigns
~~~
4. Regulatory Approach/Legal
The key difference between the two candidates: Obama is more regulatory oriented; Romney is more deregulatory.Obama prefers some regulation, and was a proponent of Dodd-Frank.
Romney would like to see less regulation, would overturn Dodd Frank.Obama supports the Volcker Rule; Romney does not.
Neither candidate supports a restoration of Glass Steagall or the full repeal of the Commodity Futures Modernization Act of 2000. Neither would treat derivatives as insurance products.
In terms of litigation, the Obama adminsitration has (very belatedly) begun suing banks for mortgage fraud and misrepresentation; he has not pursued any actions against Wall Street firms. Romney has stated he would not pursue litigation against money center banks or Wall Street firms.

Economic Impact of Hurricane Sandy

http://money.cnn.com/2012/10/30/news/economy/sandy-economic-impact/index.html?

History of recessions

http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States

GDP growth by state, 2011

http://www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm

Elections and economic indicators - excellent maps

Press on the button just above the map to change topic, and pick a state from drop-down menu on the right

http://www.pbs.org/newshour/vote2012/map/unemployment.html

3rd quarter GDP numbers

Increase: 2% annual rate, above expectation of 1.5%


Comments:

• Government spending increases most in two years
• Business spending falling; await fiscal cliff resolution
• Housing purchases increase

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.0 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent. 

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and residential fixed investment that were partly offset by negative contributions from exports, nonresidential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.

The acceleration in real GDP in the third quarter primarily reflected an upturn in federal government spending, a downturn in imports, an acceleration in PCE, a smaller decrease in private inventory investment, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by downturns in exports and in nonresidential fixed investment.
Read more at http://www.calculatedriskblog.com/2012/10/real-gdp-increased-20-annual-rate-in-q3.html#6hOy5wiSRpoW9MmD.99 


http://www.calculatedriskblog.com/2012/10/real-gdp-increased-20-annual-rate-in-q3.html

====================

Comprehensive discussion: http://www.ritholtz.com/blog/2012/10/gdp-better-thx-to-defense-spending/

GDP better thx to defense spending

 

By Peter Boockvar - October 26th, 2012, 8:13AM

GDP in Q3 rose 2.0%, better than expectations of 1.8% and an improvement from the 1.3% rise in Q2. Nominal GDP was up by 4.8%, well above the estimate of 3.9% as the Price Deflator was up by 2.8%, the 2nd most gain since Q3 ’08 and higher than the forecast of 2.1%. Personal Spending was up by 2%, actually a touch less than expected. Gross Private Investment was up by .5%, below the gain seen in Q2 as spending on equipment and software was flat after solid gains in previous quarters. Residential construction picked up some of that slack with a 14.4% rise. Trade was a modest drag as exports fell 1.6% while imports were lower by just .2%. Federal Government spending looks like the main driver of the better than expected headline print as it rose by 3.7% led by a 13% gain in defense spending. Spending at the state and local level fell by a .1%. Inventories were a tiny drag as they rose less than the gain seen in Q2. Real final sales, taking out the inventory influence, rose by 2.1% vs 1.7% in Q2 and 2.4% in Q1. Bottom line, 2% growth is about in line with the average seen over the past three years of 2.1% but the deceleration in trend is evident as the economy grew 2.4% in ’10, 1.8% in ’11 and averaging 1.8% in ’12. Mathematically, GDP should grow at population growth + productivity. Population is growing by 1% and productivity just 1% vs the 30 yr average productivity growth of 2.2%. We need more savings and investment for this, not more borrowing and spending pushed by gov’t monetary and fiscal policy.

=---------------------------

http://global.econoday.com/byshoweventfull.asp?fid=451307&cust=global-premium&year=2012&lid=0#top

2012 Economic Calendar

powered by

Resource Center »  U.S. & Intl Recaps   |   Event Release Dates   |   Event Definitions   |   Today's Calendar

United States : GDP Released On 10/26/2012 8:30:00 AM For Q3a:2012 Prior Consensus Consensus Range Actual Real GDP - Q/Q change - SAAR 1.3 % 1.9 % 1.0 % to 3.9 % 2.0 % GDP price index - Q/Q change - SAAR 1.6 % 2.0 % 1.4 % to 2.7 % 2.8 % Market Consensus before announcement GDP growth was unexpectedly revised down for the second quarter. The Commerce Department estimated growth at a mere 1.3 percent annualized pace, compared to the second estimate of 1.7 percent and advance estimate of 1.5 percent. The latest number was sharply slower than the 2.0 percent seen in the first quarter and especially the 4.1 percent boost posted for the fourth quarter of last year. Definition Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. Real GDP growth is always quoted at a quarterly annual rate. It measures how much the economy has grown over a three-month period. Quarterly growth rates are often volatile; consequently, economists also like to look at the year-over-year growth in GDP. The yearly changes tend to be more stable. Data Source: Haver Analytics It is common to compare quarterly changes at annual rates in the GDP deflator. These can be volatile, just like the quarterly swings in real GDP growth; as a result, the trend in inflation is better determined by year- over- year changes. Data Source: Haver Analytics 2012 Release Schedule Released On: 1/27 2/29 3/29 4/27 5/31 6/28 7/27 8/29 9/27 10/26 11/29 12/20 Release For: Q4a: Q4p: Q4f: Q1a: Q1p: Q1f: Q2a: Q2p: Q2f: Q3a: Q3p: Q3f: A: Advance P: Preliminary F: Final ===================================== Another commentary http://www.ritholtz.com/blog/2012/10/a-closer-look-gdp-data/ A Closer Look GDP Data   By Barry Ritholtz - October 26th, 2012, 12:15PM Adventures in confirmation bias: The GDP data this morning was a deep sigh of relief for those people who fear a recession may be coming. I don’t have that sense of relief. Perhaps its my own bias, but the details of the GDP report reveal not an organic growth period in a healthy recovering economy, but rather a tepid post-credit crisis expansion highly dependent on government largesse and Federal Reserve accommodation. It is about what we should expect: Below-trend growth, as the economy gradually heals, individual and bank balance sheets slowly improve, and the excesses of the prior cycle get wrung out of the system. Consider the major factors within this GDP report: -Residential construction rose 14.4%. Housing is a bright spot; with sales and prices increasing.  However, this has been artificially goosed by the Fed’s ultra low rates and purchases MBS. Mortgage rates are at their lowest levels since WW2, and foreclosure abatements have created an appearance of reduced distress sales. So this portion of GDP is positive but artificial; it added about 0.3% to GDP. -Defense Spending rose by 13% — this added 0.6% to GDP.  This is not what we want driving GDP, but rather, Ii prefer to see private sector improvements. -Business Spending remains soft. Ignore the nonsensical “Uncertainty” trope; if demand were there, businesses would add personnel and make CapEx investments as necessary. (idiotic rationalizations spoon fed to the gullible do not count as intelligent economic analysis to me — and that includes “uncertainty”). -Slowing Exports (down 1.6%) took a few bips off of GDP. -Midwestern Drought I do recognize that the probably whacked almost half a percentage point from overall GDP numbers (0.1% times 4Qs for an annualized 0.4%). By my numbers, half of the GDP gains came from Fed/Uncle Sam. The slowdown in Europe and Asia are pressuring economic activity; the drought took away some of the gains, and without that, we should have seen some more strength. Overall, this report suggests that we are not yet in recession, yet, but are barely above stall speed — more like a 1.5% GDP ex-government interventions and drought. The improvements we are seeing seem to be driven mostly by Fed and government intervention. The key question, in light of the mediocre earnings season, is how long the propping up can continue. Sources: GROSS DOMESTIC PRODUCT: THIRD QUARTER 2012 (ADVANCE ESTIMATE) BEA, October 25, 2012 http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_adv.pdf PERMALINK Category: Economy, Federal Reserve. -------------------------------- Another look:  http://www.calculatedriskblog.com/2012/10/comments-on-q3-gdp-and-investment.html Comments on Q3 GDP and Investment by Bill McBride on 10/26/2012 12:15:00 PM The Q3 GDP report was weak, with 2.0% annualized real GDP growth, but slightly better than expected. Final demand increased in Q3 as personal consumption expenditures increased at a 2.0% annual rate (up from 1.5% in Q2), and residential investment increased at a 14.4% annual rate (up from 8.5% in Q2). Investment in equipment and software was flat in Q3, and investment in non-residential structures was negative.   However, it appears the drag from state and local governments will end soon (after declining for 3 years). Overall this was another weak report indicating sluggish growth. The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy. For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue. The dashed gray line is the contribution from the change in private inventories. Click on graph for larger image. Residential Investment (RI) made a positive contribution to GDP in Q3 for the sixth consecutive quarter. Usually residential investment leads the economy, but that didn't happen this time because of the huge overhang of existing inventory, but now RI is contributing. The good news: Residential investment has clearly bottomed. The contribution from RI will probably continue to be sluggish compared to previous recoveries, but the ongoing positive contribution to GDP is a significant story. Equipment and software investment was unchanged in Q3 (compared to Q2). This followed twelve consecutive quarters with a positive contribution. The contribution from nonresidential investment in structures was negative in Q3. Nonresidential investment in structures typically lags the recovery, however investment in energy and power has masked the ongoing weakness in office, mall and hotel investment (the underlying details will be released next week). The second graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005. The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 6 quarters (through Q3 2012). However the drag from state and local governments is ongoing, although the drag in Q3 was very small. State and local governments have been a drag on GDP for twelve consecutive quarters. Although not as large a negative as the worst of the housing bust (and much smaller spillover effects), this decline has been relentless and unprecedented. The good news is the drag appears to be ending. In real terms, state and local government spending is now back to 2001 levels, even with a larger population. Residential Investment as a percent of GDP is up from the record lows during the housing bust. Usually RI bounces back quickly following a recession, but this time there is a wide bottom because of the excess supply of existing vacant housing units. Last year the increase in RI was mostly from multifamily and home improvement investment. Now the increase is from most categories including single family. I'll break down Residential Investment (RI) into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories. The last graph shows non-residential investment in structures and equipment and software. I'll add details for investment in offices, malls and hotels next week. The key story is that residential investment is continuing to increase, and I expect this to continue (although the recovery in RI will be sluggish compared to previous recoveries). Since RI is the best leading indicator for the economy, this suggests no recession this year or in 2013 (with the usual caveats about Europe and policy errors in the US). Earlier with revision graphs: • Real GDP increased 2.0% annual rate in Q3 Read more at http://www.calculatedriskblog.com/2012/10/comments-on-q3-gdp-and-investment.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29#KdtcmucAZ1v3zsOX.99