Thursday, November 29, 2012

A Second Look at Third Quarter GDP

This morning, the government released revised estimates of third quarter GDP.  Though the headline number looks good (by today's standards!), there's less than meets the eye (no, I'm not trying to be negative).  Economic growth was revised up from 2% to 2.7%.  However, growth in consumer spending was revised down from 2% to 1.4% and business investment declined by 2.2%, its worst showing since 2009 (led by the first decline in investment in equipment and software since the end of the recession).  So why was economic growth revised upward?  Higher government spending, more inventories, and fewer imports (due in part to weaker consumer spending).  Private demand (i.e, excluding inventories and government spending) rose by 1.26%.

So what's the takeaway?  The economy continues to move forward, but slowly.  Consumer spending was sluggish in the spring and summer while business investment has weakened considerably.  The combination of rising inventories and modest consumer spending suggests limited production in the coming quarters as businesses seek to trim their inventories to get them back in line with sales.  Most forecasts estimate that the economy will remain sluggish through the middle of next year, growing by between 1.5 and 2% in the fourth quarter and between 1% and 2% in the first quarter of 2013 (see my forecast page).  Of course the what happens to the fiscal cliff will have a lot to say as to the direction of the economy as we enter 2013.  Given the likelihood of the end of the payroll tax cut, which will result in a 2% tax hike for most Americans beginning in January 2013, consumer spending will remain sluggish at best in the coming months.  Are there any bright spots?  Believe it or not, residential investment has grown by 13.7% in the last 12 months (from a depressed rate) and is now the fastest growing segment of the economy.