U.S. GDP Upgraded on Falling Oil, Rising Dollar
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Stronger demand for services could drive the United States GDP growth rate higher, causing many investment banks to turn bullish just as U.S. stocks see a wide selloff.
Service industry revenue rose 5% year-over-year in the third quarter of 2014, far above analysts’ expectations. Economists are attributing the surprise surge to greater discretionary purchasing power amongst American consumers as oil prices fall. The news caused analysts at JP Morgan to upgrade GDP expectations from 4.3% to 4.4%, while Barclays raised their expectation from 4.1% to 4.2%.
Stronger demand for services could drive the United States GDP growth rate higher, causing many investment banks to turn bullish just as U.S. stocks see a wide selloff.
Service industry revenue rose 5% year-over-year in the third quarter of 2014, far above analysts’ expectations. Economists are attributing the surprise surge to greater discretionary purchasing power amongst American consumers as oil prices fall. The news caused analysts at JP Morgan to upgrade GDP expectations from 4.3% to 4.4%, while Barclays raised their expectation from 4.1% to 4.2%.
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Rest of World Loss, U.S. Gain
Economists believe that domestic demand is strengthening in the United States, which is more than offsetting weak demand abroad. If the diverging trend between American and global demand continues, analysts believe more investors could seek to buy U.S. equities and debt, which could have a number of ripple effects that in turn will cause asset and debt prices in the U.S. to surge further.
The dynamic has already bolstered the U.S. Dollar, which continued to post gains in this week’s trading.
Job Growth to Come in Healthcare, Accounting
Services demand was broadly positive, but varied greatly from sector to sector. Amongst employer firms, accounting, tax preparation, and payroll service sectors saw the largest gains, rising 10% year-over-year in the third quarter after rising 8.8% in the previous quarter. The acceleration is largely attributable to a falling unemployment rate, more churn in the labor market, and broader investment in human capital throughout the American economy. Employment services also saw a strong gain, with a 6.5% year-over-year rise in the third quarter after gaining 6.1% in the second quarter of 2014.
Hospital services also saw a healthy acceleration in demand, as hospital revenue rose 6% year-over-year in the third quarter from 4.9% in the previous quarter.
Additionally, transportation and tourism saw strong gains in demand, while publishing; including software publishing, broadcasting, and cable industries saw year-over-year declines. The steepest falls in revenue were from natural gas distribution, which declined 14% year-over-year, and central bank operations, which fell 8.6% year-over-year.
Construction Encourages Optimism
While services demand are rising, analysts say that upward revisions to wholesale inventories and construction spending in recent reports could indicate an overall economic expansion far beyond expectations. Several bankers released optimistic macroeconomic notes to investors on Wednesday, even as stocks sold off broadly.
To contrast banker enthusiasm, early morning trading saw a broad selloff in U.S. stocks that was much deeper than seen in the rest of the world, except in Japan where shares slid over 2%. At the same time, volatility of the S&P 500 as measured by the VIX spiked over 9% in Wednesday trading.
As stock traders lowered their risk profiles, bond traders indicated a bearish view of future inflation and economic growth, despite the revision to services demand. Long-term U.S. Treasuries rose. The 10-year Treasury yield fell 16 basis points to 2.21% and the thirty-year fell 21 basis points to 2.86%, indicating that growth was likely to remain weaker than previously expected, and risks of a rate hike from the Federal Reserve remain low.
For 2014, 10-year Treasury yields have fallen over 26%, with bond prices rising accordingly. Oil futures also fell on Wednesday, with WTI crude oil futures sliding 3.8% to $61.40 in Wednesday trading.
