Third Quarter GDP Report

The government released its initial estimate of GDP for the third quarter and it came in slightly higher than expected at a 2% annualized growth rate (compared to 1.3% in the second quarter and 2% in the first quarter).  Consumer spending rose by 2%, federal government spending (led by defense) rose by 9.6%, and residential investment rose by 14.4%.  On the downside, business investment declined by 1.3% and exports fell by 1.6%.  The primary contributors to the faster growth were government spending (went from subtracting 0.1% from growth in the second quarter to adding 0.7% in the third quarter) and consumer spending which added 1.4% to growth in the third quarter compared to 1.1% in the second quarter.

What does the report suggest about the strength of the private sector?  Here's a chart of final private demand over the last 5 years (includes consumption, fixed investment (not inventories), and net exports):

 

 



After posting a gain of 3% in the first quarter of 2012, the growth rate of private demand has declined to 1.9% in the second quarter and 1.4% in the third quarter (the lowest growth since the summer of 2010).  Thus, while the the headline number showed slightly faster growth, the underlying strength of the private sector seems to be slipping.

A major reason for this slowdown is the weakness of business investment in equipment and software:

After growing at about a 10% rate in 2010 and 2011 and 5% in the first half of 2012, investment in equipment and software was flat (tiny negative) in the third quarter, the weakest performance since the Spring of 2009 (at the end of the recession).  In addition, exports declined for the first time since the first quarter of 2009, reflecting the global economic slowdown.

What's the takeaway?  The economy continues to struggle, still growing but at a low rate with some signs of increasing weakness in the private sector.