US growth misses expectations at the first reading

Q3 was expected to be slower than Q2 in the US. The first reading of US growth, Advance GDP, showed Q3 GDP dropping back to +2.0% (annualized) versus +6.7% in the final reading of Q2. This was a fairly significant miss of market expectations which were looking for around +2.7%.

According to the Bureau of Economic Analysis (BEA), a resurgence of COVID-19 infections and new restrictions. Perhaps one of the reasons why we are not seeing a more considerable negative reaction to this data is that the latest and forward-looking data such as PMIs, suggest the economy is rebounding well in Q4 (the October flash Composite PMI showed an increase to 57.3 from 55.0 in September).

Real GDP 

However, it will be interesting to see if subsequent revisions to GDP are downward too (the second reading of Q3 growth “Prelim GDP” is on 24th November). The Atlanta Fed’s GDPNow system suggests that Q3 growth could be closer to zero at the moment. We will know more as subsequent data is revealed.

Chart, line chart

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What does this mean?

GDP is always seen as backward-looking, and considering there are signs of a decent bounce back already coming in current data for Q4, there may be limited impact by this.

However, the negative surprise is still something that is hitting markets initially, even if it is unlikely to change anything for the Federal Reserve.


Initial Market Reaction

The reaction is slightly clouded due to the ECB meeting which is holding its press conference as the GDP data has been announced, however, it seems to be USD negative so far. GBP/USD is a reasonably good gauge of this and has rallied by around +15 pips so far since the data.