Third Quarter GDP Growth Clocks In At 2.0%
Another mostly disappointing report on the state of the economy.
After second quarter GDP growth finally settled in at an incredibly anemic 1.3% growth, there wasn’t a whole lot of hope among analysts that the numbers for the third quarter would be any better. After all, the months of June through September had seen generally slow job growth, reports indicating that the manufacturing sector was slowing down from its previous levels of growth. At most, analysts were expecting that this first report on the third quarter would come in around 1.8%, and as it turned out it ended up just a little bit ahead of that:
The United States economy grew at an annual rate of 2 percent in the third quarter, slightly better than expected, with help from a healthier housing sector and a pickup in defense spending. But economists warn that growth could slow in the final quarter of the year if weakness in exports persists and businesses remain cautious because of fiscal uncertainty in Washington.
The new figure, released by the Commerce Department on Friday, is the government’s first estimate of growth in the third quarter. It compares with the 1.3 percent pace of growth in the second quarter. In the first quarter of 2012, the economy also grew by 2 percent.
The slow pace of growth since the end of the recession has been a dominant theme in the presidential race, with Republicans pointing to recent data as evidence that the economy is moving too slowly to make a meaningful dent in unemployment.
But there were several elements of good news for the White House in Friday’s report. Consumer spending rose at a seasonally adjusted annual rate of 2 percent, compared with 1.5 percent in the second quarter. Residential investment increased at an annual rate of 14.4 percent in the third quarter, versus 8.5 percent in the second quarter, a positive sign for the housing sector.
“All in, today’s report showed somewhat faster domestic demand driven by the household sector,” said Maury Harris, chief economist at UBS Securities.
The report comes amid fears that companies are clamping down on spending in the face of potential tax increases and spending cuts in the United States, a recession in parts of Europe and a deceleration in demand from China. Some economists fear that all these factors will keep a lid on any pickup in growth in the final quarter of 2012 and the first quarter of 2013.
Friday’s report, for example, showed that exports decreased by 1.6 percent in the latest quarter, compared with a 5.3percent increase in the second quarter. It was the first time exports had fallen since the first quarter of 2009, when the global economy was reeling from the collapse of Lehman Brothers and the ensuing financial crisis in the United States.
Among the biggest factors in the uptick of growth in the gross domestic product was a 13 percent jump in defense spending. On the other hand, a drop in farm inventories —fallout from the severe drought this summer — shaved 0.4 percent off overall growth.
Without the increase from defense spending, the economy would have grown at an annual rate of 1.4 percent, said Steve Blitz, chief economist at ITG Investment Research.
“The economy really just continues to churn at a very slow rate,” he said. Two big engines that initially powered the economy in the wake of the recession — exports and business investment — have both been fading recently, he said, and that does not bode well for growth.
Real federal government consumption expenditures and gross investment increased 9.6 percent in the third quarter, in contrast to a decrease of 0.2 percent in the second. National defense increase 13.0 percent, in contrast to a decrease of 0.2 percent. Nondefense increased 3.0 percent, in contrast to a decrease of 0.4 percent. Real state and local government consumption expenditures and gross investment decreased 0.1 percent, compared with a decrease of 1.0 percent.
That huge increase in defense spending was enough to account for 6/10th of a point of growth, but it’s not something that will lead to sustained economic growth, largely because it isn’t sustainable. Indeed, as Brad Plumer explains, the increase is largely a function of the Federal Budget process:
[T]he huge uptick last quarter was unusual. So what happened? Here’s one explanation: “In the Pentagon, you have to use it or lose it by the end of the fiscal year in September,” says Lawrence Korb, a former assistant secretary of defense now at the Center for American Progress. “You see this a lot. ‘We’ve got to fly a lot this month for training, otherwise Congress will take back the money they gave us.’ ”
Michael O’Hanlon, a defense analyst at the Brookings Institution, concurs that defense expenditures often rise just before the end of the fiscal year in September. Every year, Congress provides the Pentagon with a certain amount of budget authority. If the militarydoesn’t spend the full amount, there’s the risk that lawmakers could come back the following year and reduce the defense budget. “The Pentagon wants to show that the money’s well spent,” says O’Hanlon. “But they can also fall out of favor with Congress if they spend too little.”
But then why was the surge in military so unusually large this past quarter, compared with previous Septembers? Two reasons. First, the Pentagon is facing the prospect of sharp budget cuts at the end of the year as part of the looming sequester. There’s been some talk that the military could even lose money that’s already been budgeted but hasn’t been spent yet — so the Pentagon has additional incentive to spend funds now that have been budgeted over multiple years.
The other factor, Korb and O’Hanlon note, is that Congress was late in setting the defense budget for fiscal year 2012: The budget was finally patched together through continuing resolutions in the winter. So, for a significant period, the Pentagon was unsure exactly how much it could actually spend. That could help explain why defense expenditures and investments were relatively anemic earlier this year and then skyrocketed right before the fiscal year ended in September.
“It looks like what we’re seeing is a confluence of budget and political factors,” says O’Hanlon.
In other words, the increase in the defense spending was a fluke that isn’t going to be repeated. If you look deeper into the numbers, there’s not really anything there to feel good about. Yes, consumer spending did go up, and that’s generally a good thing, but it’s still very anemic and 1.4% growth (not including defense spending) is pretty much just as anemic as what we’ve seen throughout the year. Yes, it’s better than a situation where the economy is contracting, but we’re talking about a growth rate that is so pathetically slow that it would take years for us to get back to where we were before this recession started, and it’s certainly not going to be sufficient to generate significant job growth.
Politically, I’m not sure that these numbers are going to have much of an impact. The Obama camp will cite the fact that the economy has been growing, albeit anemically, for thirteen consecutive quarters, but the fact that it is in fact so anemic means that they aren’t going to be able to put very much lipstick on this pig. The Romney campaign will point out how slow the growth actually is, of course, but it strikes me that GDP growth isn’t exactly a statistic that voters pay much attention to. If any economic statistic is going to motivate voters, it’s going to be the unemployment number that gets released one week from today, a mere four days before the Presidential election. Given how close the race remains, that number could end up pushing undecided voters into one camp or the other and, potentially, deciding the election.
Update: Dylan Matthews reminds us not to put too much heed in this report. This is the BEA’s first estimate, additional revisions will be released in November and December. In all likelihood, we’ll see the growth number revised downward.