3Q2011 Gross Domestic Product: Second Estimate

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The Bureau of Economic Analysis (BEA) estimated 3Q2011 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of 2.0 percent, down from the advance estimate of 2.5 percent but up from 1.3 percent in 2Q. Despite the downward revision, the 3Q estimate was the highest reading in a year. Personal consumption expenditures (PCE) and net exports (NetX) contributed to 3Q growth in that order, while private domestic investment (PDI) and government consumption expenditures (GCE) exerted “drags.”
 

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Among the notable items in the report (from the Consumer Metrics Institute):

-- Aggregate consumer expenditures for goods was revised downward slightly to a +0.30 percent annualized growth (previously reported to be +0.35 percent).

-- The annualized growth rate for consumer expenditures was also revised downward by 0.05 percent, and is now estimated to be at 1.33 percent.

-- The growth rate of private fixed investments was lowered by 0.15 percent, with the new number coming in at 1.45 percent.

-- The draw-down of inventories is now nearly a half percent worse than previously reported, pulling -1.55 percent from the headline annualized growth rate. Conventional wisdom is that this bodes well for the economy in the future, since production will presumably have to eventually ramp-up to replace that lost inventory.

But in fact there are a number of wildly conflicting ways to “spin” this inventory number:

-- Production has lagged demand, with factories struggling to keep up with increasing demand (unfortunately implausible given the anemic consumer growth numbers mentioned above);

-- Factories are reducing inventories in anticipation of weakening demand (plausible);

-- Inventory levels were ridiculously high to begin with (implying that much of the "recovery" was wishful thinking; again plausible);

-- Factories have simply cut production costs by cutting production levels (thereby inflating bottom lines without the benefit of increasing commerce; highly plausible);

-- Or our favorite: the BEA's deflators have shot them in the foot again (with deflating commodity prices "shrinking" inventories even as physical inventories remain largely unchanged; also highly plausible).

Of the five spin scenarios outlined above, the only positive one is also the least plausible.

-- Total expenditures by governments at all levels is now reported to be very slightly contracting, continuing a string of four quarters of contraction. This number masks a duality in state and local spending levels, where "consumption expenditures" (i.e., operating budgets) continue to shrink but are partially offset by increasing investments on infrastructure.

-- Exports are now reported to be slightly higher relative to the previous estimate, raising the contribution that they made to the overall GDP growth rate to +0.58 percent.

-- Imports dropped substantially compared to the previous "advance" report, and are now removing only -0.09 percent from the growth rate of the overall economy (previously this number was -0.34 percent, a full quarter of a percent worse for the headline number).

-- The annualized growth rate of "real final sales of domestic product" was revised up slightly to +3.56 percent. This was the result of the higher draw-down of inventories offsetting the generally weaker numbers shown elsewhere.

-- Perhaps the most negative item among the revisions is in per-capita disposable income, which was revised sharply downward and is now reportedly shrinking at an annualized -2.1 percent rate during the third quarter (revised from a -1.7 percent in the previous "Advance" estimate). If you are looking for one line item that largely explains the mood of the general public, this is the one to monitor.

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The GDP has strengthened the recession call made by Federal Reserve analyst Jeremy Nalewaik. Nalewaik’s analysis correlated the onset of recessions with a fall in the year-over-year change in gross domestic product (GDP) below 2 percent. Since 1947, the U.S. economy either was already or soon would be in recession each time the year-over-year change in GDP fell below 2 percent (the red dashed line in the figure above). The year-over-year GDP change now stands at 1.5 percent in 3Q.