Labor Market Strong, Economy on Track

Despite a disappointing third quarter, the nation's economy is growing at a healthy clip and the labor market looks strong after a "gangbusters" report on October employment growth, Atlanta Fed Executive Vice President and Research Director Dave Altig said during a November 17 webcast.

Altig cited President Dennis Lockhart's November 5 speech in which he said the economy is probably in an "above-potential growth phase." But solid second-quarter gross domestic product (GDP) growth of 3.9 percent dipped to 1.5 percent for the third quarter, according to the first estimate from the U.S. Bureau of Economic Analysis. That figure will be revised. The decline in growth notwithstanding, Altig said he and the Atlanta Fed economic research team believe the economy is still on the path Lockhart described.

Some of the third-quarter decline in measured GDP growth is tied to inventory changes at businesses. While economists pay close attention to the surveys of inventories, it is a statistic that can jump around from quarter to quarter, Altig cautioned during the ECONversations webcast.

Inventories a tricky indicator
That volatility means it is hard to decode what the inventory data mean for future economic growth, he added. There are two basic scenarios. The bad one: Companies have been surprised by weak sales and thus have an unwanted buildup of inventories, which could signal economic weakness ahead. Firms will soon need less new products from their suppliers, which could mean manufacturers will make fewer goods, shippers will ship less, and so on. On the other hand, Altig said, high inventories could be a sign that businesses are upbeat, stocking up in anticipation of healthy demand.

For now, the Atlanta Fed research staff is carefully watching inventory changes but does not view the readings as a bad omen, Altig said. That's based on analyzing other data and conversations with business contacts through the Atlanta Fed's Regional Economic Information Network (REIN).

ECONversations are Bank webcasts featuring Atlanta Fed economists. REIN Director Galina Alexeenko joined Altig on the most recent show.