• INDICATOR: Third Quarter GDP
• KEY DATA: GDP: +1.5%; Consumption: +3.2%; Private Domestic Spending: +3.2%; Consumer Inflation: +1.2%; Excluding Food and Energy: +1.3%
• IN A NUTSHELL:   “Forget the headline number, the domestic economy did really well during the summer.”

WHAT IT MEANS:  The Fed is hoping that growth improves, inflation picks up and wages rise. 

Well, at least on the growth side, conditions are actually pretty good. 

Yes, GDP grew at a less than impressive pace during the summer, but as I have warned often, don’t get fooled by the headline number.  The details were a lot better. 

Consumption was strong and it wasn’t just vehicles.  Demand for nondurables and services was solid as well.  Services are 65% of consumption and we have settled into a nice 2.5% to 3% spending trend.  That puts a base under growth. 

As for business investment, there were two factors that restrained growth.   First, the expected slowdown in inventory building occurred and the inventory swing took over 1.4 percentage points out of growth.  The second big issue remains the huge cut backs in the energy sector. 

Those reductions are slowing and should continue to moderate.  Excluding the energy-related declines, investment was pretty solid, which is what should be the case in the quarters to come. 

The housing sector also continues to add nicely to growth.  Other than the Defense Department, government spending at all levels rose at a decent pace. 

Finally, both imports and exports rose but the trade deficit was largely unchanged. 

But the clearest indication that the home front economy is in very good shape comes from the special measure called Final Sales to Private Domestic Purchasers. 

This removes the swings in inventories, excludes the foreign sector and factors out government.  It reflects the health of the consumer and businesses and it rose sharply and has been doing so for over two years. 

The domestic economy is in good shape.  Inflation is still going nowhere and even excluding food and energy, price increases were modest and are not accelerating.

MARKETS AND FED POLICY IMPLICATIONS: This was a really good report. 

The two factors that restrained growth, a move to reduce excess inventories and the adjustment in the energy sector, should ease up over the next couple of quarters. 

Meanwhile, income gains were solid, consumers are spending, businesses outside the energy sector are investing, housing is solid and despite the strong dollar, we keep selling to the rest of the world. 

And with a budget agreement, we might even get some more defense spending. 

The fundamental domestic economy is growing at a greater than 3% pace and there is every reason to believe that will continue. 

Indeed, don’t be surprised if GDP growth is well in excess of 3% in the fourth quarter. 

Since the Fed members parse the data as well, they probably also see an economy that could support a rate hike. 

But I believe the Fed need to see a further firming in the labor market and some indication that non-energy prices are rising if we are to get a December increase. 

How will investors view the GDP numbers?  Got me. 

Yesterday, they were told that a December rate hike was absolutely on the table and instead of panicking, they rallied.  This was after the markets rallied on the belief there would not be a rate hike. 

So if you know what investors want the Fed to do, tell me and we both can invest accordingly!