Gross Domestic Product is a measure of the nation’s economic activity. The statistic measures the sum of the nation’s production for both the private and public sectors. A nation with an increasing GDP in real terms is considered to be growing, while one with a declining GDP in real terms is in recession. (NOTE: By real economists mean adjusted for inflation and population and to be in recession GDP has to decline for at least 2 consecutive quarters).
The BEA put out its advance estimate of 3st quarter 2013 GDP and reports that the overall economy grew by 2.8 percent. This is up slightly from the revised 2nd quarter estimate of 2.5 percent. The government measures GDP in consumption terms, and reports that the increase in the 3rd quarter is primarily due to a deceleration in imports and accelerations in private inventory investment and in state and local government spending. The more important areas of exports, nonresidential fixed investment, and personal consumption expenditures all showed lower growth the 3rd quarter.
On the positive side, there are two long term trends contributing to GDP growth this year that suggest improvement in the economy. First, the trade deficit (exports less imports) has been falling fairly steadily and is at just -$413.2 billion in the third quarter. This is down from -$436.5 billion during the same period last year and suggests that the country is producing more of what it consumes. Exports are up by 4.5 percent and imports up by just 1.9 percent during the quarter.
In addition to the improving trade balance, the level of capital investment has been very strong over the year. This is in part due to the obscenely low interest rate policy being maintained by the Federal Reserve, which is providing businesses with very inexpensive capital. Capital investment was up by 9.5 percent in the 3rd quarter, following growth rates of 4.2 percent in the 1st quarter and 4.7 percent in the 2nd. On the other hand, growth in residential property investment is up at an even faster rate which may be pointing to another housing bubble on the horizon.
Another positive factor has been that the overall share of government spending in the economy has been falling. Most of this has been due to reductions in defense spending, but overall Federal government spending on a quarter to quarter basis has been falling in real dollar terms for all of the past 5 quarters. This has been offset slightly by growing state and local spending but even that is down on a quarter to quarter basis from the 3rd quarter of 2012.
All of this suggests that the normal machinery of the economy is functioning and that the economic recovery – though stunted – is going through a normal business cycle. We believe that continued slow growth in the economy will keep the pressure on the Federal Reserve to keep interest rates at ridiculously low levels forcing continued bond purchases on the open market. Pressure will continue on the dollar making imports more expensive and helping to stimulate exports to some extent. Overall, the potential for rapid positive changes in the overall economy are not great.