Latest Report on GDP

This morning's GDP report surprised on the downside.  Instead of growth of 2.5% in Q3, it's now estimated to have grown by 2%.  The good news is that the primary reason for the downward revision was slower growth in inventories, which subtracted 1.5% from economic growth.  This suggests that firms are being cautious in terms of inventory management, reducing the likelihood of future cutbacks in production (and increasing the chance of slightly stronger growth in Q4).  Typically, one cause of recessions is companies having excess inventories that they need to reduce to get them back in line with sales.  Of course the weak growth in Q3 confirms that the economy was continuing to struggle heading into the end of the year.  After being propped up in Q1 by the payroll tax cut, disposable income adjusted for inflation has declined in Q2 and Q3.  If the payroll tax cut is not renewed for 2012 (resulting in a 2% tax hike for workers, averaging about $1000 per worker), disposable income and consumer spending will be hurt early in 2012, contributing to economic weakness.