Jump in Inventories Leads to Stronger than Expected GDP Growth

Dean Baker:

Jump in Inventories Leads to Stronger than Expected GDP Growth: The economy grew at a 2.9 percent annual rate in the third quarter, the strongest growth rate since the third quarter of 2014. Most forecasts had put growth for the quarter at just over 2.0 percent. While the growth is better than expected, a big factor was an increase in inventory accumulation, which added 0.61 percentage points to growth. Accumulation was actually negative in the second quarter, so the rate of accumulation is likely to be even higher in the fourth quarter, again adding to growth. Final demand growth in the quarter was just 2.3 percent. Most categories of final demand were relatively weak...

One striking figure in this report is the slower pace of inflation shown in the core personal consumption expenditure deflator (PCE). This rose at just a 1.7 percent annual rate in the third quarter. The rate of inflation shown in the core PCE has been trailing off throughout the year, rising at a 2.1 percent annual pace in the first quarter and a 1.8 percent rate in the second quarter. While there are enough erratic movements in the quarterly data to avoid treating this as evidence of deceleration, it is certainly hard to make a case for acceleration with these data.

In this respect it is also worth noting that the Employment Cost Index for the third quarter showed a year over year rise of just 2.3 percent, the same as for the second quarter. Wage growth continues to outpace benefit growth in the private sector, with wages rising 2.4 percent, compared to 1.8 percent for benefits.  

On the whole, this report indicates that the economy continues to grow at a modest pace. With the weak first half, it will take another quarter of 2.9 percent growth to just reach 2.0 percent for the full year. That is at or below most estimates of potential GDP. The price data also show zero evidence of accelerating inflation, indicating the economy is not reaching any limits.