US advance Q3 GDP will be released on Thursday October 29th. Q3 GDP is expected to rise by 3.2% compared to -0.7% last quarter. The GDP report is expected to post its first expansion since Q2 2008 and confirm the US economy has emerged from recession. GDP has contracted in five of the last six quarters. GDP posted a modest rise in Q2 2008 sparked by government rebate checks. Government spending likely contributed to improvement in Q3 GDP. Q3 GDP is expected to post a big gain with growth boosted by strong private consumption fueled by the government cash for clunkers program and stronger manufacturing. The cash for clunkers program likely contributed about 3% to GDP. Q3 Industrial production rose by 5.25% and manufacturing production was up 7%. Q3 GDP gains will also reflect a smaller drop in inventories, improvement in export sales and solid growth in residential construction. Residential construction was supported by the governments 8k tax credit for first time home buyers and exports by weaker USD. Weakness in commercial real estate may be a drag on Q3 GDP growth.

A strong Q3 gain is a given. The key question is whether growth can be sustained as the cash for clunkers program has ended and the tax credit for first time home buyers is to expire at the end of November. Auto sales were weak in September after the cash for clunkers program expired. September existing home sale surged 9.4%. The surge in existing home sales may reflect the pulling forward of home sales as new home buyers try to beat the November deadline for the expiration of the tax credit program. There is movement in Congress to pass legislation to extend the tax credit for first time home buyers through June of 2010 but at this writing no extension legislation has been passed. It is not clear if home buying will drop sharply when the tax credit expiries but housing demand appears to be slowing. Construction of new homes was essentially flat in September. NAHB builder's sentiment fell to 18 from 19 last month. Housing starts for September rose by just 0.5% and building permits fell by 1.2%.

Consumption is key to GDP outlook. 70% of GDP depends on consumer demand. The  end of the cash for clunkers and expiration of the tax credit for first time home buyers suggest that  that the GDP rebound is likely to slow in 2010. The IMF forecasts that US GDP will grow by 1.9% in 2010. Rising US unemployment and the falling USD present additional risks to GDP. With US unemployment at a 26 year high and expected to remain elevated for years to come, consumer spending will remain weak. The IMF predicts US unemployment will average 9.3% in 2010.October consumer confidence unexpectedly dropped to 47.7 from 54 last month. The drop in consumer confidence points to weaker future consumption. Consumer spending will remain weak absent new government programs to boost growth or a significant improvement in the labor market. The falling USD may make it difficult for the US to fund record deficit spending. The US government will auction a record 123 bln in bonds this week.  The increased supply of government bonds may force yields higher. US government bond issuance may eventually crowd out the individual borrower from obtaining cheap credit. Availability of affordable consumer credit and mortgage financing is the fuel for consumption. US bond yields spiked to a two month high Monday and 30 year mortgage rates are back above 5%. The withdrawal of government stimulus  programs and a sustained rate rise would slow the rebound in US GDP and invite speculation that the US may face a double dip recession. USD direction remains closely correlated to the direction of the S&P. How US equities react to the GDP report will determine the short-term direction for the USD.