You can't buy, sell or trade GDP, but this week's report of a barnburner 7.2 percent rise in gross domestic product is very significant. It informs us of the likelihood of a true recovery boom -- call it the Bush boom -- in the months and quarters ahead.
Within the third-quarter report, capital expenditures rose 11 percent overall and 15.5 percent for equipment and software. This beats the previous quarter, when equipment and software climbed more than 8 percent. The rally in tech stocks and new upwardly revised tech-industry estimates confirm that we're in the midst of a replacement cycle for computers and that fast-rising demands for broadband and Internet services are for real. Big DVD sales in electronic stores are more confirmation of the tech upswing.
What's extremely impressive is that 7.2 percent GDP occurred alongside a huge $36 billion drawdown of inventory (which followed an $18 billion de-stocking in the second quarter). So this was reflected in real final sales of businesses, a huge increase of nearly 8 percent in worldwide aggregate economic demand, and final sales at home (less trade), which increased 6.6 percent. In fact, private sector GDP -- the classic free-enterprise measure of consumption and investment, which has averaged 6.1 percent at an annual rate over the past two quarters -- hit a 7.8 percent moon shot in the latest report.
Total spending in the economy also surged by 9 percent, combining 7.2 percent real growth with 1.7 percent inflation. This "money GDP" measure is a useful proxy for total business sales. According to economist John Ryding at Bear Stearns, non-farm business sales increased by 11.6 percent annually in the third quarter. With an implied productivity gain of 9 percent for the total non-farm economy, unit labor costs will come in way below business profits.
In simple language, when prices rise faster than costs, profits go up -- and business profits are the mother's milk for the stock market, and future corporate production and hiring.
According to this week's data, economic profits from national income accounts (the very broadest measure of corporate profits) are roughly 50 percent higher than their bottom, which registered near the 9-11 terrorist attacks. Broad stock averages, meanwhile, have increased about 35 percent from their year-ago lows. On this basis alone, the stock market still looks to be 15 percent undervalued at the minimum.
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