Get Up to Speed on Q3 GDP with Vincent Truglia of Granite Springs Asset Management

Benzinga Radio spoke with Vincent Truglia, head of global economic research at Granite Springs Asset Management to get the details on a 3rd quarter real GDP release that was filled with conundrums. Truglia:

“What was most surprising was the personal consumption expenditures which surged at an annual rate of 2.4% at the same time we had a decline in personal disposable income – so basically what we've seen is that consumption is being financed out of savings. It's hard to fully understand what consumers were thinking in the 3rd quarter, since they know there's a serious unemployment problem and we have all the dysfunction in Washington – what was really going on to make them continue to consume and if anything raise their levels of consumption by drawing down on savings? So this is a conundrum. And this tells me that even though this number is certainly better than what many people expected, including myself, it still raises a concern about what will happen as we move into 2012.”

Also notable was a turnaround in durable goods consumption and a sharp increase in the services sector. These unexpected performers lend some positivity to this quarter's release, but as Truglia points out they are unlikely to provide a boost outside of the short term:

”...the consumption of services was up at an annual rate of 3%. This is stronger than it's been for many many quarters, and the explanation was that housing expenditures and utility expenditures and health care expenditures went up very very strongly. When you add those unusual durable goods changes and what I think are somewhat unusual changes in service purchases I don't really think we're quite out of the woods yet.

Looking ahead to Q4 and 2012, domestic policy will be pivotal in determining growth levels.

“The real concern that I have over the 4th quarter is that we have a payroll tax cut this year, and if it is not extended – it was cut as you remember by 2 percentage points – if that is not extended into next year, for the average worker that would represent an increase in taxes to them of about 48%, so it's a very significant hike. If it doesn't get passed then consumers are going to be hit with significant tax increases.”

This tax cut is likely to be a serious issue in coming months as things are not running smoothly in Washington. Finally, Truglia sees a paradigm shift in the way economies are being managed:

“For the first time in a decade, it's macroeconomics and politics that are driving the economies. This is really quite unusual, so that traditional analysis of what's going to happen to an economy just doesn't work quite as well anymore because what were normal assumptions that you could make regarding the policy framework are all up in the air.”