According to the U.S. Department of Labor (DOL), GDP in the United States rose at an annual rate of 2.7 percent in the third quarter. The first revision of the advance estimate indicates a strong headline number but some weakness in different components.
“The acceleration in real GDP in the third quarter primarily reflected upturns in private inventory investment and in federal government spending,” says the DOL. The administration releases three versions of GDP figures: the first “advance estimate,” a revision of the advance estimate, and a final figure.
Low Quality Components Positive
The DOL said in its release that inventories contributed 0.77 percentage points to the 2.7 figure. The total growth figure of 2.7 percent describes the change in output compared to the last quarter on an annualized basis. This number can then be broken down in components, such as inventories. In this case, 0.77 percent for inventories means that inventories constituted 0.77 growth points of the 2.7 percent total.
It is important to note that this composite merely reflects the growth and not the composition of GDP as a dollar number, where inventories play a much smaller role. They make up only 0.53 percent ($84 billion) of the $15.8 trillion in goods and services produced.
Inventories are a very volatile component of GDP and represent merchandise that wasn’t sold. Analysts generally want to see a low contribution to GDP growth from inventories.
“Inventories also boosted real GDP a sharp 0.8 percentage point. Falling farm inventories in particular should drag on 4Q growth. We continue to expect a sub- 1% reading from 4Q real GDP,” wrote Citigroup in a note.
Another low quality component is government spending, which contributed 0.67 percentage points to the composite. Due to budgetary and other constraints, increases in this component are likely short term in nature.
“Some unusual boosts to 3Q will not repeat in 4Q. Government outlays rose 3.5 percent on a 12.9 percent surge in defense spending, which seems likely to reverse near term,” says Citigroup.
Trade also factors into GDP—in two parts. Rising exports contribute positively to GDP, while imports reduce the number. In the third quarter, exports fell sharply, however, contributing only 0.16 percentage points, compared to 0.72 in Q2. But imports also decreased nearly in step, only subtracting 0.02 percentage points compared to minus 0.49 in Q2. Together, this indicates a general slowdown in trade. Normally, booming international trade is a sign of a healthy upturn.
High Quality Components Disappoint
Economists usually want to see strong investment by companies and strong consumption by consumers, indicating a sustainable uptrend. Companies invest in plants and equipment to make more goods. They hire workers, which in turn spend their wages on newly produced merchandise, creating a virtuous cycle.
Fixed investment at companies, also called capital expenditure, only contributed 0.1 percentage points, the lowest figure since Q1 2011 and down from 0.56 percent during Q2.
On the plus side, investment in residential housing contributed 0.32 percent to growth, compared to 0.19 percent the quarter before, confirming some of the stronger housing data seen during the last quarter.
Personal consumption, the factor responsible for 70 percent of U.S. GDP ($11.15 trillion) only contributed 0.99 to growth, down from 1.72 percent in the first quarter.
Citigroup finds these developments worrying: “Real consumer spending rose 1.4 percent, softer than expected, though cyclical components of spending like durables were solid. Of greater concern, [private] investment was revised down to a 2.2 percent rate of decline from -1.3 percent.”
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