3Q2010 Gross Domestic Product: Second Estimate

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The Bureau of Economic Analysis (BEA) reported that the rate of growth in real U.S. gross domestic product (GDP) accelerated more in 3Q2010 than originally estimated. The U.S. economy expanded at a 2.5 percent annual rate (the original estimate was 2.0 percent), up from 1.7 percent in the previous quarter.
 

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The BEA’s revisions showed bigger gains in exports, consumer spending and business investment in new equipment than previously estimated. However, David Rosenberg, chief economist at Gluskin Sheff, provided some counterbalance to the seemingly “positive” 3Q GDP revisions:

“While the upward revision to 3Q GDP was impressive and broad-based, the monthly data on GDP reveal a sharp deceleration. For example, over the three months to September (point-to-point as opposed to quarterly averages), real GDP actually slowed to a 1.0 percent annual rate -- down from 1.7 percent in July, 2.6 percent in June and 4.6 percent at the turn of the year. Based on information at hand, it looks as though 4Q real GDP is coming in closer to a 1.7 percent annual rate, so the moderation in overall economic activity will be more evident this quarter than it was in Q3 (sometimes quarterly averages masks what the true momentum really is).

“Heading into the second year of a recovery, [we should expect to see] a 5 percent-growth economy that is accelerating; not a 1 to 2 percent-growth economy that is rife with downside risks. To be sure, corporate profits have been terrific, but not due to any meaningful increase in top-line pricing power. Fully 96 percent of the rebound in output since the recession ended has been due to productivity growth -- talk about a miracle, especially since there has been no capital deepening now for about a decade. Productivity leads to income growth, but when the U6 unemployment rate is 17 percent (which means dramatic excess capacity in the jobs market), that income accrues to capital, not to labor.

“Compensation per hour is declining and unit labor costs have fallen nearly 2 percent in the past year, which has been a major underpinning for profit margins, to be sure. How long the productivity miracle can last is anyone's guess, but the excess slack in the labor market will linger on. What kept the consumer alive through all this was the massive help from Uncle Sam, but that is now coming to an end, which in turn will have some negative impact on domestic demand and revenue growth for the business sector. So, the combination of strong ex-U.S. growth and sustained solid productivity gains are going to be needed more than ever in order for the string of profits-surpassing-expectations to be extended into 2011.”