Third Quarter GDP Revised Upward, Not Necessarily Good News
The big economic news today came in the form of the Commerce Department’s first revision to the third quarter GDP numbers which showed that the economy grew at the stronger than expected rate of 2.7%:
Even as the government said that the United States economy grew faster than first estimated in the third quarter, economists warned that the rate of expansion could slow sharply before the end of the year as worries mount about the fiscal impasse in Washington.
The Commerce Department said Thursday that gross domestic product expanded at an annual rate of 2.7 percent in the three months ended Sept. 30, well above the 2 percent estimate it initially made in late October. But the revision was driven by increased inventory accumulation and a jump in federal spending — factors unlikely to be repeated in the current fourth quarter, economists said.
What’s more, the revised figures show spending by businesses on equipment and software declined by 2.7 percent in the third quarter, the first decrease since the end of the recession in mid-2009 and a sign of just how cautious many companies have become amid the uncertainty in Washington and slowing growth in Asia and Europe.
“It’s a nice headline number,” said Nigel Gault, chief U.S. economist at IHS Global Insight, of the 2.7 percent rate, “but it exaggerates the underlying momentum in the economy. Sustainable improvements in growth are not driven by inventories.”
The two biggest growth areas in the third quarter — inventory growth and federal spending — “are likely to be minuses in the fourth quarter,” he said. Mr. Gault expects the annual rate to sink to 1 percent this quarter, hurt by a fiscal stalemate in Washington as well as the aftereffects of Hurricane Sandy.
To be sure, there were signs of optimism in Thursday’s data. Residential fixed investment rose 14.2 percent, a sign that the housing recovery is gaining steam. Indeed, a separate report Thursday from the National Association of Realtors showed pending home sales rose to a two-and-a-half-year high.
And not all economists took a pessimistic view. “The economy certainly hasn’t taken off, but it’s nowhere close to a stall,” said David Kelly, chief global strategist for JPMorgan Funds. “The economy is still underperforming its full potential, but once we get past the ‘fiscal cliff’ uncertainty, we could see stronger growth next year.”
The new estimate of growth represents a substantial increase in the level of the second quarter, when the economy grew at a rate of just 1.3 percent. It also marks the fastest rate of expansion since the fourth quarter of 2011, when the economy grew at a 4.1 percent annual pace.
This was the second of the government’s three estimates of quarterly growth. The final figure is scheduled for Dec. 20.
Brad Plumer explains why this isn’t necessarily good news:
On the surface, this looks like a good sign—the economy was growing even faster than we thought. The revision also makes President Obama’s reelection seem a bit less mysterious, seeing as how the economy was actually trundling along at a healthy clip in the months leading up to November.
But the details of the report aren’t entirely positive. About 0.7 percentage points of growth between July and September came from an anomalous spike in federal defense outlays. We’ve already dissected that strange surge in military spending — experts say it most likely came from the Pentagon looking to spend through its existing budget authority before the end of the fiscal year (and before the sequester spending cuts clamped down).
What’s more, another 0.8 percentage points of growth came from faster-than-expected inventory accumulation. Businesses were restocking at a faster rate, but sales weren’t necessarily keeping up. Final sales growth actually got revised downward from 2.1 percent to 1.9 percent. Many analysts think it’s unlikely that companies will keep stockpiling inventory next quarter — if anything, they’re likely to cut back a bit as sales slow.
So growth last quarter was boosted by two short-term factors. And the problem here, as Nigel Gault of IHS Global Insight points out, is that the rest of the economy — apart from housing — is still relatively fragile. “Consumer spending growth was sluggish at 1.4 percent, business fixed investment declined, and even though exports did better then first thought they were only up 1.1 percent,” Gault notes. “The one shining star was residential fixed investment, up 14.2 percent as the housing recovery kicked into gear.”
In other words, don’t expect to see this 2.7% continue into the 4th Quarter. Indeed, there are already indications that businesses are cutting back on investment in anticipation of the probability that Congress will be unable to resolve the fiscal cliff issues before the end of the year. For that reason, as well as the fact that at like 1.5% of the growth we saw in the third quarter is due to temporary factors that are not going to be repeated in the fourth quarter, it seems likely that the final quarter of the year will be much slower, and that we’ll be in much more danger of slipping into a recession if Congress is unable to resolve the fiscal cliff.