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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.

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. Anderson says:

    None of these reports is ever “necessarily” good news, it seems.

    I’m waiting for a new report based on revised statistics: “Commerce Dep’t Revised Statistics Show That Recession Never Happened; Really, We Were All Doing Fine.”

    Like or Dislike: Thumb up 3 Thumb down 0

  2. gVOR08 says:

    So, once again we’ve caught the Commerce Department understating the numbers just before the election to help Barack Obama. Wait, that didn’t sound right…

    Beyond my expertise, but a couple of questions present. Yes, DOD does expend unused funds before the end of the fiscal year. As stated in the article, they do this every year. So wouldn’t it be captured and washed out in a seasonal adjustment?

    What’s the breakdown on inventory build up? Is this something odd, or the usual prepping retail for Christmas? Again, is this something outside the usual seasonal thing?

    Like or Dislike: Thumb up 4 Thumb down 0

  3. stonetools says:

    I’ll take it as good news, compared to what we have experienced the last four years.
    I’m not going to go into panic mode over THE FISCAL CLIFF!!!! either.
    These things have a way of working themselves out, and the Democrats have a strong hand with a good poker player running the show.
    I expect to see more growth, and a good result (for Democrats ) in the” fiscal cliff negotiations” with a minimal amount of economic disruption.

    Like or Dislike: Thumb up 4 Thumb down 0

  4. john personna says:

    Gosh, I wonder why Doug picked that cherry, and not say …

    Record Corporate Profits

    Like or Dislike: Thumb up 7 Thumb down 0

  5. michael reynolds says:

    @john personna:
    There can be no good news until we achieve Doug’s libertarian nirvana.

    If everyone found a million dollars in their stocking on Christmas morning we’d focus on the coming shortage of Porsches and beachfront property.

    Like or Dislike: Thumb up 13 Thumb down 0

  6. OzarkHillbilly says:

    In other news, Doug looked out his window at lunch, saw that it was sunny with blue skies and the temp was 62. To which he observed, “It’s still gonna snow this winter!”

    Like or Dislike: Thumb up 8 Thumb down 0

  7. Tsar Nicholas says:

    The real concern with the economy still so weak — despite rock bottom interest rates, relatively-benign inflation and trillions upon trillions of public dollars and the kitchen sink having been thrown at it by the Feds — is what on earth will it look like when interest rates inevitably rise and inflation inevitably has reared its ugly head? Well, you don’t need a finance degree to figure out that it’ll be grim. Real grim. It’s also not rocket science that with all this coffee talk about a “fiscal cliff,” this coming January, the real fiscal cliff will be presented when Social Security implodes upon itself. If Gen. Y was a stock I’d be short selling it.

    That all said, as we move towards having the final nails hammered into the country’s fiscal, monetary and economic coffins, it’s not the case that all is lost for all of us. There still are plenty of arenas in which pockets of success, capital returns and overall prosperity reside.

    Medicine. Engineering. Computer science and related fields. All remain part and parcel of long-term growth industries.

    Syndicated commercial real estate partnerships with preferred returns. Other hard assets, e.g., pipeline master limited partnerships. Precious metals. Certain foreign currencies, e.g., the Swiss Franc, Canadian Dollars, Australian Dollars. All remain viable long-term investments.

    Batten down the hatches, however. And caveat emptor. For it’ll be a bumpy ride. Politics and policies have consequences.

    Like or Dislike: Thumb up 0 Thumb down 5

  8. michael reynolds says:

    GDP grew faster than we thought, deficit dropping, record corporate profits, stock market up, housing market coming back. . . we’re all gonna die!

    Highly-rated. Helpful or Unhelpful: Thumb up 20 Thumb down 0

  9. gVOR08 says:

    @OzarkHillbilly: My brother from Minn. used to tell a story. He’d meet the local farmers at the hardware store. Always something: too hot, too wet, cost of fertilizers to high… Always something. Finally they had a year everything came together. perfect weather, bumper crop, crop failures elsewhere so record high prices. “Them heavy crops sure take a lot out of the soil.” Those good GDP quarters sure cut into capacity. But I’m sure it’s good news for John McCain.

    Like or Dislike: Thumb up 8 Thumb down 0

  10. It’s also not rocket science that with all this coffee talk about a “fiscal cliff,” this coming January, the real fiscal cliff will be presented when Social Security implodes upon itself. If Gen. Y was a stock I’d be short selling it.

    Why Gen Y isn’t the one depending on social security payments to survive. If you really believe SS is about to implode, you ought to be shorting the Boomers.

    Like or Dislike: Thumb up 4 Thumb down 0

  11. @Tsar Nicholas:

    Batten down the hatches, however. And caveat emptor. For it’ll be a bumpy ride. Politics and policies have consequences.

    “If we can hit that bullseye, the rest of the dominoes will fall like a house of cards… Checkmate!”

    Like or Dislike: Thumb up 5 Thumb down 0

  12. C. Clavin says:

    Decreases in the UE are not good news…increases in GDP are not good news…polling wasn’t good for Obama leading up to the election he won…I’m sure the Dow at 13,000 is shitty news in Doug’s world.
    Personally…I only do recreational drugs…but if I was as depressed as Doug constantly seems to be…I might seek professional help…and pharmaceuticals.

    Like or Dislike: Thumb up 1 Thumb down 0

  13. Clavin,

    Read what Brad Plumer wrote. Then read it again. More than half of the 2.7% increase can be accounted for by things that will not be repeated in the future and which are unlikely to add to long-term growth.

    Like or Dislike: Thumb up 0 Thumb down 1

  14. C. Clavin says:

    “…despite rock bottom interest rates, relatively-benign inflation and trillions upon trillions of public dollars and the kitchen sink having been thrown at it by the Feds…”

    Actually Federal spending is flat. If the Obama Administration was spending money and growing Government the way that Republicans always spend money and grow Government then GDP growth would be at least a point higher…so 3.7…almost 4%. If you have a problem with the economy look at Republicans…they are intentionally holding it back.

    Like or Dislike: Thumb up 5 Thumb down 0

  15. C. Clavin says:

    @ Doug…
    So what…then something else will happen once…and then something else.
    And again…you are getting the economy that you want…spending is flat and Government is shrinking. Name one economy that has grown while shrinking Government.
    You’re getting what you want and still you’re a Gloomy Gus.
    If you won the lotto you might slit your wrists.

    Like or Dislike: Thumb up 10 Thumb down 0

  16. wr says:

    @Tsar Nicholas: “If Gen. Y was a stock I’d be short selling it. ”

    Yes. We know this. Do you know how we know this? Because you say the same idiot thing in every other message you post. At least four times a week. There is an infinitesimal chance that some reader might actually have cared about what you would do if Gen Y were a stock the first time you posted this. There is absolutely none that anyone still does.

    I’m really okay with your being a loathesome troll who believes that Americans who live in cities are subhuman. I’m fine with your complete inability to master the nuances of the English language.

    But for God’s sake, could you please come up with some original material or just shut the hell up?

    Highly-rated. Helpful or Unhelpful: Thumb up 25 Thumb down 0

  17. michael reynolds says:

    @wr:

    If I had more than one upvote to give, I’d give it to you.

    Like or Dislike: Thumb up 2 Thumb down 0

  18. OzarkHillbilly says:

    @gVOR08: Yeah, my sis tells me the same. Them Norwegian farmers don’t trust anything.

    Like or Dislike: Thumb up 2 Thumb down 0

  19. OzarkHillbilly says:

    @michael reynolds: I gave it for you Michael.

    Like or Dislike: Thumb up 2 Thumb down 0

  20. OzarkHillbilly says:

    @OzarkHillbilly: My sis lives in MN.

    Like or Dislike: Thumb up 0 Thumb down 0

  21. bk says:

    @Tsar Nicholas:

    Medicine. Engineering. Computer science and related fields. All remain part and parcel of long-term growth industries.

    BUT those subjects are taught at LIBERAL universities (some of them located in decaying LEFTWING urban areas) by LEFTIST hippies, I thought.

    Like or Dislike: Thumb up 3 Thumb down 0

  22. bk says:

    @Doug Mataconis:

    More than half of the 2.7% increase can be accounted for by things that will not be repeated in the future

    Until, probably, next year at this time.

    Like or Dislike: Thumb up 3 Thumb down 0

  23. michael reynolds says:

    I can’t help but note that the economic reports during the Clinton and W. Bush years were not ritually accompanied by reminders that the numbers were mostly bogus since they were based on a housing bubble and various financial frauds.

    Oh, if only we could get back to the good old days when we were heading into a disaster, as opposed to these fraught days when we’re heading out of one.

    We are bubble-free, and everyone hates it.

    Like or Dislike: Thumb up 11 Thumb down 0

  24. KariQ says:

    @Tsar Nicholas:

    what on earth will it look like when interest rates inevitably rise and inflation inevitably has reared its ugly head?

    Since neither of these things is going to happen as long as as we have a lack of aggregate demand, weak growth, and high unemployment, I find it astounding that so many conservatives keep screeching “Inflation!” as if 1920s Germany level of inflation will break out tomorrow, or the day after.

    Well, okay, I am not actually astounded by this. I would be astounded if there was the slightest hint that any of them were in contact with reality, understood the causes of inflation, particularly hyperinflation, and could possibly be expected to understand that neither of them is likely to happen during a period of low aggregate demand. But since they live in their own little world where things are true because they want them to be, nothing they say really surprises me.

    Like or Dislike: Thumb up 5 Thumb down 0

  25. john personna says:

    @michael reynolds:

    Bubble: Is the Student Loan Debt Crisis Worse Than We Thought?

    (Didn’t Tsar move his bet? It used to be “the US economy” now “gen-Y” which might be a way of coming at the education problem, cruelly)

    Like or Dislike: Thumb up 0 Thumb down 0

  26. James in LA says:

    @wr: But for God’s sake, could you please come up with some original material or just shut the hell up?

    Given that Tsar never responds, it is just as likely he is an abandoned piece of auto-posting malware who’s only intent is to get a rise out of “lefties.”

    Like or Dislike: Thumb up 2 Thumb down 0

  27. john personna says:

    And … a very good bit from Felix Salmon on deeper problems:

    The problem with the return of manufacturing

    What we’re seeing here is the same thing that we saw at Hostess: wages that are so low, the workers prefer to give up the work entirely, and take a better-paying job elsewhere.

    In a piece for Salon, Jake Blumgart quoted a bakery worker who had been at the company for 14 years. “In 2005, before concessions I made $48,000, last year I made $34,000…. I would make $25,000 in five years if I took their offer. It will be hard to replace the job I had, but it will be easy to replace the job they were trying to give me.”

    Like or Dislike: Thumb up 8 Thumb down 0

  28. Console says:

    This is good news… for Mccain!

    Does all the original commentary about the “good but not good enough” 3rd quarter numbers now need to be revised into a new narrative?

    Like or Dislike: Thumb up 0 Thumb down 0

  29. bill says:

    it’s not like the economy has so much to do with who’s in the white house, but after 4 yrs it usually fixes itself despite the unfriendly atmosphere.

    Like or Dislike: Thumb up 0 Thumb down 6

  30. gVOR08 says:

    @OzarkHillbilly: Yah sure.

    Like or Dislike: Thumb up 0 Thumb down 0

  31. john personna says:

    @bill:

    Stories of “why this recession is different” have been a mainstay of the last 4 years. There are several reasons, but a credit pop and a whack directly to home finances were key.

    Like or Dislike: Thumb up 0 Thumb down 0

  32. bk says:

    @bill:

    it’s not like the economy has so much to do with who’s in the white house, but after 4 yrs it usually fixes itself despite the unfriendly atmosphere.

    Yeah, pretty unfriendly. http://economix.blogs.nytimes.com/2012/11/29/record-corporate-profits/

    Like or Dislike: Thumb up 0 Thumb down 0

  33. Brummagem Joe says:

    I know Doug is a fully paid up member of the media doom and gloom industry but this is baloney. Inventories went up in Q3 right before the Thanksgiving/Christmas season (remember this is thru the entire supply chain). Wow …..how amazing. The real test will be whether all that inventory gets consumed and hence impacts factory orders in Q1 of 2013. Based on what I’m seeing now I’m betting it will. How many recessions have you forecast over the last three years Doug? LOL. There isn’t the slightest chance of this country slipping into recession and we all know the fiscal cliff negotiation is going to be settled essentially on Obama’s terms even if it drags into next January. I’m afraid it’s bad news for the doom and gloom industry …..Obama and the Democrats are going to be smelling of roses in three years time and it’s going to be after a tax hike on the wealthy thus blowing up one of their most cherished myths.

    Like or Dislike: Thumb up 1 Thumb down 0

  34. An Interested Party says:

    I’m really okay with your being a loathesome troll who believes that Americans who live in cities are subhuman.

    He certainly isn’t the only one around here who believes that…

    We are bubble-free, and everyone hates it.

    Well, not everyone

    Like or Dislike: Thumb up 0 Thumb down 0