Third Quarter Economic Growth: 1.6%

And yet more evidence that the economy is slowing (not that I expect this to make much difference to the Troo Believers out there). For the third quarter of 2006, the Bureau of Economic Analysis’ advance estimate of GDP growth is 1.6%.

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.6 percent in the third quarter of 2006, according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.6 percent.

Now this is just the advanced estimate which means that the data it is based on is incomplete and real GDP growth is subject to revision. So while it is possible that growth was higher, the best guess right now is that growth is slowing.

Why is growth slowing?

The deceleration in real GDP growth in the third quarter primarily reflected an acceleration in imports, a downturn in private inventory investment, a larger decrease in residential fixed investment, and decelerations in PCE for services and in state and local government spending that were partly offset by upturns in PCE for durable goods, in equipment and software, and in federal government spending.

The deceleration in non-durable personal consumption expenditures (PCE) and residential fixed investment is somewhat problematic. Also, while this does point to a slowing economy it doesn’t mean that a recession is imminent and that there could be a “soft landing” (see also this). However, lets also keep in mind that the latest drop in housing prices was very large and that does not bode well for the economy.

FILED UNDER: Economics and Business,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. spencer says:

    the long term growth rate of the US economy is 3.5%.

    Bush has been in office 5, going on 6 years and he has experienced one year of above trend growth and that was only 3.9%.

  2. I guess I am a trooo believer, so lets go to some one else who may not a bit about economics.

    Former Federal Reserve Chairman Alan Greenspan said Thursday the U.S. economy was pulling past a sharp housing sector downturn but warned the dollar was being challenged as the world’s reserve currency.

    The 1.6% is for a single quarter. We had a 1.8% 4th quarter in 2005, which seemed not to be the immediate harbinger of doom as the next quarter we grew at 5.6%. If we had 0.0% growth in 4th quarter, we would grow at 2.5% for all of 2006. If we just grew in 4th quarter at the same 1.6%, that would mean a 2.9% for all of 2006. If the 4th quarter was an average of the first three quarters, we would grow at 4.4% for all of 2006. And if the 1.6% was followed by another whopper quarter (like the 1.8% in 2005), we would have annual growth at 5.1% for all of 2006.

    Now consider the g8 2005 growth rate. Japan had 2.7%. Germany had 0.9%. France 1.4%. UK 1.8%. Italy 0.1%. Russia 6.4% (on $1.6T of GDP vs US $12.4T GDP). Canada 2.9%.

    European union as a whole had 1.7% GDP growth in 2005. US had a GDP growth of 3.2% in 2005.

    So when we are looking at a range from 2.5% (assume 0.0% growth in 4th quarter) to 5.1% (assumes 5.6% growth in 4th quarter) with 4.4% being the average so far (including the current 1.6%), I still think the US economy seems to be one of the top performers.

    As far as what causes it to go up and down, lets look at some earlier advance GDP quarters

    4Q05
    The deceleration in real GDP growth in the fourth quarter primarily reflected a deceleration in
    PCE, an acceleration in imports, a downturn in federal government spending, and decelerations in
    equipment and software and in residential fixed investment that were partly offset by an upturn in
    private inventory investment.

    1Q06
    The acceleration in real GDP growth in the first quarter primarily reflected an acceleration in PCE
    for durable goods, an upturn in federal government spending, and accelerations in equipment and
    software and in exports that were partly offset by a downturn in private inventory investment.

    2Q06
    The deceleration in real GDP growth in the second quarter primarily reflected downturns in PCE
    for durable goods and in equipment and software, decelerations in exports and in PCE for nondurable
    goods, a downturn in federal government spending, and a larger decrease in residential fixed investment
    that were partly offset by a deceleration in imports, an acceleration in PCE for services, and an upturn in
    private inventory investment.

    So we see parts of the economy go up and parts go down every quarter.

    So please ignore me as a trooo believer, but I still like to look at the economy in context, not just a scare headline about the unadjusted preliminary finding on one quarter. I we getting set for a recession, soft landing, record growth or what? I don’t know, but in context the economy still looks pretty good to me.

  3. Steve Verdon says:

    Well clearly spencer we need to make the tax cuts permanent and increase the size of the deficit.

  4. Wayne says:

    The infamous housing starts have begun to rise as well.

    Well clearly Steve we need to increase taxes and increase the size of the deficit.

  5. Fersboo says:

    YAJ, well done, I’ve seen very few move Steve ‘All Economic Negativity All the Time‘ Verdon to speechlessness.

  6. Steve Verdon says:

    YAJ, well done, I’ve seen very few move Steve ‘All Economic Negativity All the Time‘ Verdon to speechlessness.

    Good gravey, I go to eat lunch and suddenly I’m “speechless”. Please Fersboo, speak for yourself and not everybody else as well, it makes you look like an arrogant twit.

    YAJ,

    That the economy is slowing is pretty much accepted by most analysts who are at least somewhat serious. Trying to argue that this is a mere nothing and that things will be great next quarter strikes me as naive at best.

    If we had 0.0% growth in 4th quarter, we would grow at 2.5% for all of 2006.

    Yes, well below the average, and I suspect below the average growth rate for Bush’s first term. Now if that isn’t slowing economic activity, you need to revise your definitions.

    Now consider the g8 2005 growth rate. Japan had 2.7%. Germany had 0.9%. France 1.4%. UK 1.8%. Italy 0.1%. Russia 6.4% (on $1.6T of GDP vs US $12.4T GDP). Canada 2.9%.

    Irrelevant, IMO. When one talks about economic growth for country X accelerating or decelerating one should look at country X, not countries A, B, C, D, and E.

    And going back to this part,

    If we had 0.0% growth in 4th quarter, we would grow at 2.5% for all of 2006. If we just grew in 4th quarter at the same 1.6%, that would mean a 2.9% for all of 2006. If the 4th quarter was an average of the first three quarters, we would grow at 4.4% for all of 2006. And if the 1.6% was followed by another whopper quarter (like the 1.8% in 2005), we would have annual growth at 5.1% for all of 2006.

    Very good, now, how likely do you think each of those scenarios are? Seriously, I’d like you to put some probability estimates on these. If, for example, we give each equal probability, then there is a 50% probability that growth will be 2.9% or less. Not exactly strong growth. Not bad, but not strong.

    So please ignore me as a trooo believer, but I still like to look at the economy in context, not just a scare headline about the unadjusted preliminary finding on one quarter. I we getting set for a recession, soft landing, record growth or what? I don’t know, but in context the economy still looks pretty good to me.

    And most people who do this kind of thing for a living think things are slowing down. Example: James Hamilton. He’s credentials are impresisve and he is clearly not overly partisan–heck I can’t even tell what his politics are generally speaking. So, I think I’ll stick with the: the economy is slowing, lets hope for a soft landing.

  7. spencer says:

    steve says Well clearly spencer we need to make the tax cuts permanent and increase the size of the deficit.

    I see your economic prescription is the same as your Iraq policy,to just keep doing the same thing that is not working in the hopes that some miracle will suddenly cause it to start working.

    I think I’ve heard that refered to as stay the course.

  8. Steve Verdon says:

    Spencer,

    Get a life. Sheesh dude, seriously go home, have a drink and lighten up just a touch, you’ll live longer.

  9. Steve,

    Unless you don’t consider Alan Greenspan “at least somewhat serious” on this subject, he thinks the housing issue (which seems to be your big point on why we are slowing) has turned the corner. Maybe it has, maybe it hasn’t but just saying I’m not serious about it so I must be naive but ignoring Mr Greenspan doesn’t seem to me to be the strongest argument.

    The point I was making is that even if the economy cratered in 4th quarter (0.0% growth which I don’t think you are suggesting is at all likely), we would still have an annual growth rate that would not be to shabby compared to the rest of the world. Now you may discount that information, but I think it is useful to see how other countries are faring. To put it another way, we are in economic competition with a variety of countries. For the US to continue to be the economic leader in the world, we need to worry about up an comers (e.g. China and India) which may not have the largest economy today but are growing fast now (similar to small firms growing quickly, then slowing as they get larger) and compare our selves to other established economies. As long as we are growing 1%+ faster than EU, Japan, etc. we will stay well ahead (and widen our lead) economically. Saying that we should just worry about our growth rate and the rest doesn’t make sense to me. If the US grew at 4% (which I think we would both call strong growth), but the EU grew at 6%, I would be worried. Not because I think 4% indicates a looming recession, but because we aren’t staying ahead of the other guy.

    Now what is going to happen in 4Q06 is an interesting question. There was a lot of speculation earlier about higher gas prices and their impact on the economy. Will the decrease in energy costs lead to the economy strengthening? Possibly. Will the interest rate stability also help? Maybe. If Alan is right and the housing has turned the corner, then depending on how much it starts coming back we could see some high growth rates. If I look down the different components, it was one of the major negative numbers. If it is only half as bad in 4th quarter (pure speculative guess)and everything else stayed constant, then it would look like we would end with an annual rate of 3%. If imports were half as bad again, then again holding the rest the same (plus the aforementioned housing improvement) we would see 3.2% for the year (aka as good as last year).

    Now 4Q05 went up 0.6% from the advance numbers (what we are looking at here) and the final numbers. 1Q06 went up 0.8% from the advanced to the final numbers. 2Q06 went up 0.1% from the advanced to the final numbers. So it would seem the way to bet is that the final numbers for 3Q06 may be higher (as you alluded to in your post). So the numbers needed for “strong” growth may not be so high if the 3Q numbers get adjusted up.

    What should we consider “strong growth”? If I look back over the last 40 years (1967 to 2006), if we can hit 3.0 we are hitting the average growth rate. What do we need to make that happen? Stay at the 3Q06 1.6% rate and add 0.4% (either in 3Q06 adjustment to the final numbers or in improved numbers for 4Q06). I don’t think that is impossible. Could it even be higher (say a 0.4% adjustment to the 3Q06 numbers and a 2.0% 4Q06)? Sure. I’m not sure what the likelihood is but it sure isn’t fantasy and it would have us growing at better than the last 40 year average (3.1%). That would mean the economy is slowing compared to last year, but is still above average compared to the last 40 years. I guess it all depends on if you see the glass half empty or half full.

  10. Wayne says:

    YAJ
    Steve has made up his mind a long time ago and have blinders on to anything that don’t support his conclusion while throwing insults at anyone that doesn’t agree with him. I’m not sure which way it will turn out but suspect it will be at least a good year follow by another good year. I’ll watch and find out.

    YAJ, I appreciate your straightforward fact base analyses. The issue I have with the glass analogy is some see it as halve full or empty depending on whose glass it is.

  11. jpe says:

    YAJ, well done, I’ve seen very few move Steve ‘All Economic Negativity All the Time‘ Verdon to speechlessness.

    You forgot to mention something about the freshly painted schools in America.

  12. Steve Verdon says:

    YAJ,

    Unless you don’t consider Alan Greenspan “at least somewhat serious” on this subject, he thinks the housing issue (which seems to be your big point on why we are slowing) has turned the corner. Maybe it has, maybe it hasn’t but just saying I’m not serious about it so I must be naive but ignoring Mr Greenspan doesn’t seem to me to be the strongest argument.

    I think the “turned a corner” view is a bit overly optimistic. Greenspan does think there will be a soft landing, as does prof. Hamilton so that is consistent with the “weakening economy” view here.

    The point I was making is that even if the economy cratered in 4th quarter (0.0% growth which I don’t think you are suggesting is at all likely), we would still have an annual growth rate that would not be to shabby compared to the rest of the world. Now you may discount that information, but I think it is useful to see how other countries are faring.

    When your situation gets worse, do you make yourself feel better by looking at your neighbors that are even less fortunate and say, “Gee things are great for me!”? Yes, the U.S. tends to have a higher growth rate, so what? China right now has an even higher growth rate, does that make us worse off? These kinds of comparisons can be useful, but not in this context.

    Now what is going to happen in 4Q06 is an interesting question. There was a lot of speculation earlier about higher gas prices and their impact on the economy. Will the decrease in energy costs lead to the economy strengthening? Possibly. Will the interest rate stability also help? Maybe. If Alan is right and the housing has turned the corner, then depending on how much it starts coming back we could see some high growth rates. If I look down the different components, it was one of the major negative numbers. If it is only half as bad in 4th quarter (pure speculative guess)and everything else stayed constant, then it would look like we would end with an annual rate of 3%. If imports were half as bad again, then again holding the rest the same (plus the aforementioned housing improvement) we would see 3.2% for the year (aka as good as last year).

    Oil is still high in real terms as is gasoline. Granted it has come down, which lowers the probability of recession, but it still hurts growth. And if that turn around in the housing market doesn’t materialize then things might not be so good. Based on all the stuff I’ve read, I think the housing market will not “bounce back”, but it wont get much worse. So things will likely not get worse for the economy in general, but that is quite a bit different than saying that the economy is strong and that it will get stronger.

    What should we consider “strong growth”? If I look back over the last 40 years (1967 to 2006), if we can hit 3.0 we are hitting the average growth rate.

    Being average is strong? Uhhhmmm, okay, what was the average growth under Clinton, 3.7%? If 3.0 is strong, what do we call growth under Clinton? Staggerin, astounding, amazing, What? Are you willing to say the growth under Clinton’s 8 years was very good at least, and even beter than Bush so far?

    Further, averaging over the past year to support the notion that the year in total is good is misleading. Suppose you lost your job and for the next several weeks expected zero income. If you average the those weeks with the same number of weeks in the past is it really the case that your income was merely halved?

    YAJ, I appreciate your straightforward fact base analyses.

    Wayne,

    Using your own standards you should at least be honest and say that YAJ has already made up his mind long ago and has blinders on.

  13. Wayne says:

    Probably a little late but YAJ has given analyses that this year economy will be overall good even with a large decrease in the fourth quarter which is unlikely. YAJ has stated many time in previous post that he is not certain how the economy will do and seldom make a forceful prediction. Therefore I can’t honesty say that he has already made his mind up.