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Friday, October 29, 2010

Real GDP Grows at 2 Percent in the Third Quarter

I just posted this at MoneyWatch:

The BEA reports its advanced estimate for GDP in the third quarter:

Real gross domestic product ... increased at an annual rate of 2.0 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent

Calculated Risk notes "a few key numbers":

  • "The change in real private inventories added 1.44 percentage points to the third-quarter change in real GDP after adding 0.82 percentage point to the second-quarter change. Private businesses increased inventories $115.5 billion in the third quarter, following increases of $68.8 billion in the second quarter and $44.1 billion in the first."

    Without the boost in inventories, GDP would have been barely positive in Q3.

  • "Real personal consumption expenditures increased 2.6 percent in the third quarter, compared with an increase of 2.2 percent in the second."

    This was a little stronger than expected, and PCE will probably slow over the next couple of quarters.

  • Investment: Nonresidential structures increased 3.9 percent, equipment and software increased 12.0 percent and real residential fixed investment decreased 29.1 percent.

    As expected, residential investment declined sharply after the Q2 tax credit boost.

    Overall this was a weak report and will not derail QE2 next Wednesday (further easing from the Fed).
  • Positive growth is better than negative growth, but this is a loss relative to trend growth, and the fact the inventories are driving growth is of concern. Dean Baker puts it into perspective:

    It may not be immediately obvious quite how weakly the economy is growing. First, we need a reference point. When an economy gets out of a steep recession, it should be soaring, not just scraping into positive territory. In the first four quarters following the end of the 1974-75 recession, growth averaged 6.1%. In the four quarters following the end of the 1981-92 recession, growth averaged 7.8%. The growth rate averaged just 3.0% in the four quarters following the end of this recession.
    But the actual picture is even worse. Most of this growth was driven by the inventory cycle as firms went from running down their inventories to rebuilding them. If inventory fluctuations are pulled out, growth in demand averaged just 1.1% over the four quarters following the end of the recession. Final demand growth was down to just 0.6% in the most recent quarter.
    This is cause for serious concern. Inventories grew at the second fastest rate ever in the last quarter. Growth is certain to slow in future quarters, meaning that inventories will be a drag on an already slowing economy. Instead of accelerating, we are likely to see growth just scraping along near zero.

    I've been expecting a long, slow, agonizing recovery, in part because there's little chance that fiscal policy authorities will give the economy the boost it needs to recover faster. As I noted yesterday, the forecast from Macroadvisers is that employment won't fully recover until 2013. I made the same forecast about a year ago, but full recovery by 2013 is looking optimistic now. I wouldn't be surprised if it takes even longer than that.

    The San Francisco Fed is also expecting a slow recovery:


    And, again, even that might be optimistic given that they are forecasting an average growth rate for 2010 of 2.5% and today's estimate came in below that.

    This is not a strong report. As Calculated Risk notes above, this won't derail quantitative easing. However, I don't expect another round of quantitative easing to have a large impact on the growth rate of GDP. Thus, while this won't derail QEII the problem is that it won't move fiscal policymakers to action, and fiscal policy is, in my opinion, the best way to help the economy recover faster.

      Posted by on Friday, October 29, 2010 at 09:54 AM in Economics | Permalink  Comments (48)


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