The Bureau of Economic Analysis released its final estimate of economic growth in the third quarter, revising it upward for the second time to 2.6% from an original estimate of 2.0% at the end of October. The upward estimate of annualized growth in the third quarter comes mainly from personal consumption and business investment, especially in inventory, not surprising considering the holiday retail season’s approach. Exports also increased, but at a slower rate than in the previous quarter:
Real personal consumption expenditures increased 2.4 percent in the third quarter, compared with an increase of 2.2 percent in the second. Real nonresidential fixed investment increased 10.0 percent, compared with an increase of 17.2 percent. Nonresidential structures decreased 3.5 percent, compared with a decrease of 0.5 percent. Equipment and software increased 15.4 percent, compared with an increase of 24.8 percent. Real residential fixed investment decreased 27.3 percent, in contrast to an increase of 25.7 percent.
Real exports of goods and services increased 6.8 percent in the third quarter, compared with an increase of 9.1 percent in the second. Real imports of goods and services increased 16.8 percent, compared with an increase of 33.5 percent.
Real federal government consumption expenditures and gross investment increased 8.8 percent in the third quarter, compared with an increase of 9.1 percent in the second. National defense increased 8.5 percent, compared with an increase of 7.4 percent. Nondefense increased 9.5 percent, compared with an increase of 12.8 percent. Real state and local government consumption expenditures and gross investment increased 0.7 percent, compared with an increase of 0.6 percent.
The change in real private inventories added 1.61 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 $121.4 billion in the third quarter, following increases of $68.8 billion in the second quarter and $44.1 billion in the first.
The inventory addition is a potential problem. Without the expansion of inventory, Q3 GDP would be just under 1%. The impact in Q3 was about twice that in Q2, which means that businesses have anticipated somewhat higher demand. In fact, as the report states, the actual measure of final sales in Q3 is exactly what it was in Q2 — 0.9%, after subtraction of inventory expansion. The same was true in 2009 Q4 and to a lesser extent in 2010 Q1, where the expansion of inventory failed to get matched to any expansion in demand.
What changed between the second and third estimates? The data on inventory showed a greater expansion than first thought, and that was offset somewhat by a lower-than-estimated level of personal consumption. While the overall number went up thanks to added inventory, the actual sales data remained flat from Q2. If people start spending money in the holiday season, then the inventory expansion will be no problem in following quarters. If not, retailers and wholesalers will be forced to heavily discount to move the stock, which will impact bottom lines in the next couple of quarters.
It’s not an awful number, but this isn’t really good news, either. It shows sales maintaining a flat level throughout the middle of the year, and a 2.6% GDP rate is about half of what’s needed for massive expansion of job creation. This economy is simply not igniting.
Update: Market News calls the estimate “disappointing,” and makes the same point I did:
This composition lowered real final sales to just +0.9%, a very modest pace that shows little momentum. Real final sales “surged” to +2.1% in Q4:2009 and then calmed to a pace that has averaged just +1% in the three quarters recorded so far in 2010. Hopefully higher consumer spending for the holidays will bolster consumption in Q4.
Still notable in Q3 was a downturn in residential fixed investment at -27.3%, its worst performance since Q1:2009. This came about after the homebuyer tax credit expired.
One note about pinning hopes to holiday sales: that will be only a temporary bump at best. With sales flat for a year, retailers aren’t going to rush to fill inventory, especially if they have to heavily discount it to move.