|Today’s news on U.S. economic growth is not as weak as the headline number would indicate. U.S. economic growth, as measured by GDP, is estimated to have grown at a 1.5% annualized rate in the third quarter. This is down from a 3.9% pace in the second quarter.
|Digging beneath the headline numbers reveals that the apparent weakness was driven primarily by a reduction in inventories. The change in inventories subtracted 1.44% from the GDP number. The negative impact of a strong dollar was also evident in the report as the change in net exports (exports minus imports) subtracted .03% from GDP. Although exports made a positive contribution (+.24%), imports were stronger as Americans increased their purchases of cheap imports. Imports subtracted .27%.
What today’s headline number masks is the underlying stability of the consumer. On its own, consumer spending contributed 2.19% to economic growth. After a weak start to the year, where consumer spending only contributed 1.19% to GDP, consumer spending has contributed over 2% for two consecutive quarters. Consumer spending has contributed at least 2% to GDP for 6 out of the last 8 quarters. This provides some evidence that the consumer is spending some of the savings from low energy prices and cheap imports. Of the 2.19% contribution to growth, purchases of durable goods like motor vehicles, furnishings and recreational goods & vehicles contributed .99%. The remaining 1.20% contribution came from spending on services with health care expenses being the biggest source of spending.
The remaining contributors to economic growth were as follows:
Commercial construction: (.11%)
Intellectual property products: +.07%
Residential construction: +.20%
Government spending: +.30%
One observation to note is that government spending is no longer a drag on the economy. The negative effects from the fiscal tightening have passed through and now, with the budget deal that has been tentatively agreed upon by Congress, government spending is set to increase. This will bear monitoring since, without offsetting revenue, increased government spending will lead to wider deficits and a faster pace of debt accumulation.
Today’s GDP number was in line with consensus forecasts from economists surveyed by Bloomberg. As discussed above, today’s GDP number will be revised twice before it is finalized and, over the past several years, revisions have sometimes been surprisingly large.
This number does not really change much from the Federal Reserve’s perspective. This is now historical information and the Federal Reserve is focusing on current incoming data to determine whether an interest rate increase in December is justified.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.