U.S. GDP Report Deconstructed

October 26, 2018

Good News: Real GDP expanded by a somewhat greater-than-expected 3.5% between 2Q and 3Q, expressed at an annualized rate (SAAR). The two-quarter pace of 3.8% was the fastest since the middle two quarters of 2014, when a 5.0% pace was achieved. On-year growth of 3.0% was the most in 13 quarters and just 0.8 percentage points less than the strongest four-quarter pace of the current upswing, which was 3.8% between the first quarters of 2014 and 2015.

To achieve a 3.0% or better rate of U.S. real GDP growth, it is usually imperative that personal consumption perform well, since that component of aggregate demand comprises 69.5% of real GDP. Not surprisingly, personal consumption climbed 4.0% SAAR in the third quarter and accounted for 2.7 percentage points of the 3.5% GDP quarterly growth rate. On-year growth of 3.0% in personal consumption last quarter was above the 2.4% rise clocked between the third quarter of 2016 and 3Q17. The U.S. savings rate last quarter shrank to 6.4% from 6.8% in the second quarter but is not so low as to forestall further shrinkage should some drawdown of savings be needed to offset slower growth in income.

The moribund rate of government spending during the Obama presidency when the Republican congressional opposition blocked much of his proposed spending initiatives has given way to a rubber stamp relationship with the Trump White House. Government spending augmented the third-quarter GDP growth rate by 0.56 percentage points, and it grew at a 3.3% SAAR rate last quarter compared to quarterly growth of 2.5% SAAR in 2Q and 1.5% SAAR in 1Q. In year-on-year terms, government spending advanced 2.4% last quarter compared to a 0.4% contraction between the third quarter of 2016 and 3Q17.

Inflation has accelerated back toward the Federal Reserve’s target of 2.0%. The personal consumption price deflator’s four-quarter rise rose from 1.0% in the year through 3Q16 to 1.6% in the third quarter of 2017 to 2.2% last quarter. The on-year rise of the core PCE deflator was exactly 2.0% in 3Q18. Moreover, third quarter-over-second quarter comparisons of the PCE price deflator — both total and core — were 1.6%, thus suggesting that inflationary momentum actually slowed and thus dispelling any concerns that inflationary dynamics might be getting out of control.

The Bad News: The composition of today’s GDP release was not well balanced. Capital spending slowed abruptly in contrast to predictions of a huge boost from the December 2016 tax cut. Non-residential business investment edged up only 0.8% SAAR after gains of 11.5% in the first quarter and 8.7% in the second one. Residential investment actually contracted 4.0% SAAR, its third slide in a row and greater than those in the first two quarters of 2018. Taken together, non-residential and residential investment exerted a combined 0.04 percentage point drag on quarterly growth.

Although the Trump Administration’s protectionism approach to trade policy is hurting other economies, their loss hasn’t been a win so far for the United States as the president proclaimed it would. With U.S. exports contracting 3.5% SAAR last quarter but imports climbing 9.1% SAAR, net foreign demand exerted a 1.78 percentage point depressant upon U.S. GDP growth. Put differently, had net foreign demand simply been a neutral non-factor, real GDP would have grown at more than a 5.0% quarterly rate.

Alternatively, real GDP growth only surpassed 3.0% for a second straight quarter because of a pile up in inventories. A faster accumulation of inventories added 2.07 percentage points to the quarter-on-quarter U.S. GDP growth rate last summer. Without a faster expansion of business spending and exports next quarter, it will be hard to sustain growth at or above 3.0%.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



Comments are closed.