Surprise biomedical boom sees Sep GDP climb 3.3 %

Overall manufacturing may have exanded 1.3 % vs advanced estimates which showed a decline.

According to Citibank, despite the large upside surprise in Sep IP, we would be cautious to call this a turnaround in growth, considering that the uptick was largely driven by volatile biomed, which has little backward linkage to the rest of the economy.

"Today’s data would imply a 1.3%YoY expansion in 3Q manufacturing GDP, versus an expected contraction of 1.1% in the Advanced Estimates. All else being equal, this would lead to a smaller 3Q GDP contraction of 2.5%QoQ SAAR (1.0%YoY, vs. AE: -4.1%QoQ SAAR, 0.6%YoY), although we remain wary of pressures for downward revisions in transport and storage and re-exports. We suspect the higher biomed-driven uptick in 3Q IP probably contributed to MAS’s bullish implied GDP forecasts of 1.2-1.3%YoY in 2016 and 1.8% in 2017. Folding in today’s numbers, these implicit forecasts would imply a smaller 4Q16 GDP rebound of 1.2-3.9%QoQ SAAR (vs at least 4.5% previously) and an average quarterly growth of 2.2-2.6%QoQ SAAR in 2017."

Citi noted that while a 4Q jump is possible on a technical rebound from depressed levels, the implicit forecast for 2017 remains relatively bullish given the soft macro backdrop.

"Moreover, notwithstanding encouraging signs of levelling off in electronics from depressed levels, broader ex-biomed manufacturing remains in the doldrums, and the recovery in broader trade related sectors (including re-exports and transport/storage) remains fragile. As such, we would not be overly excited by one month’s data. As mentioned, should the intermittent sequential improvements in Sep fail to extend into 4Q, such that 4Q GDP continues to fall sequentially, risks of a Jan inter-meeting re-centring would remain high. We look to upcoming business expectations and tomorrow’s flash estimates of 3Q unemployment numbers for further clues of growth trajectory. Further job market deterioration could also raise likelihood of a policy response, including on the fiscal front."

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