Revised 3rd quarter GDP estimate rises to 2.5%

The Bureau of Economic Analysis revised its estimate of economic growth in the third quarter upward from its initial 2.0% estimate four weeks ago to an annualized rate of growth of 2.5%.  It’ the first time in several quarters that an intermediate estimate showed a higher rate of growth than an initial estimate.  Consumer spending rose higher than first estimated, but residential property fell more and imports cut deeper into growth as well:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.5 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent.

The GDP estimates released today are based on more complete source data than were available for the advance estimate issued last month. In the advance estimate, the increase in real GDP was 2.0 percent (see “Revisions” on page 3).

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, nonresidential fixed investment, exports, and federal government spending that were partly offset by a negative contribution from residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the third quarter primarily reflected a sharp deceleration in imports and accelerations in private inventory investment and in PCE that were partly offset by a downturn in residential fixed investment and decelerations in nonresidential fixed investment and in exports.

The new number is a larger improvement over a very weak Q2, but still demonstrates that the economy cannot create jobs in the large numbers necessary to reduce the number of unemployed.  And although areas such as personal consumption incrementally, the gains in personal consumption were far outstripped by increases in government spending:

Real personal consumption expenditures increased 2.8 percent in the third quarter, compared with an increase of 2.2 percent in the second. Real nonresidential fixed investment increased 10.3 percent, compared with an increase of 17.2 percent. Nonresidential structures decreased 5.7 percent, compared with a decrease of 0.5 percent. Equipment and software increased 16.8 percent, compared with an increase of 24.8 percent. Real residential fixed investment decreased 27.5 percent, in contrast to an increase of 25.7 percent.

Real exports of goods and services increased 6.3 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 8.9 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 0.8 percent, compared with an increase of 0.6 percent.

Inventories also increased in Q3, enough to comprise 1.3 points of the 2.5% GDP estimate; in Q2, inventory expansion added 0.82 points to the 1.7% GDP increase.  This could mean that businesses are restocking in advance of predicted increases in sales, and perhaps see a rebound in the upcoming holiday season.  However, the same dynamic took place on a larger scale in 2009Q4 and the inventory increase ended up hiding a low-growth quarter.  If the added inventory doesn’t move, as it failed to do in 2010 Q1, it will cool the manufacturing sector and erode margins at retailers as they will have to heavily discount to clear their shelves.

This demonstrates better growth than earlier numbers indicated, but it’s still not enough to change the dynamics of unemployment and the overall direction of the economy.  A 2.5% GDP rate is still economic stagnation at a level that extends high unemployment and the housing woes it causes.