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 third estimate of 3st quarter 2013 GDP and reports that the overall economy grew by 4.1 percent. This is up 46.4 percent from the BEAs initial estimate of 2.8 percent growth in the 3rd quarter. This is a very large adjustment and the BEA claims that it is due to upward revisions to personal consumption expenditures and to nonresidential fixed investment that were partly offset by a downward revision to residential fixed investment. Even so, there has been a lot of discussion recently about problems with the government’s statistical programs (we think due to lack of funding rather than an actual attempt to politicize the data) and such a sizable revision is questionable.
The government measures GDP in consumption terms, and reports that the increase in the 3rd quarter is primarily due to an increase in accumulated inventories (which account for about 40 percent of the total increase in GDP). Even so, GDP was still up substantially, with much of that driven by increased investment (accounting for 22 percent of the increase). Nearly all of the rest came from personal consumption expenditures. It is always good to see a significant percentage of growth resulting from new investments and this case is no exception. Even when stockpiling is removed from the calculation actual consumption based GDP rose by a very reasonable 2.4 percent, above the slow growth pattern seen over the past few years.
These good GDP numbers suggest that the economy is improving and suggest that the country may finally be breaking out of its economic malaise. Strong growth in capital investment and improvements in the trade deficit (which is down to just $419.8 billion on an annualized basis) may be showing up in higher consumption expenditures. If the inventory growth tempers in the 4th quarter, 2014 GDP growth may be higher that we have forecast. That said, this recovery has seen spurts of life in the past which extinguished themselves very quickly.
Nevertheless, these GDP numbers and the other solid economic data that came out in December has finally encouraged the Federal Reserve to start moderating their ridiculously loose monetary policy, something that must happen before a sustained recovery can occur. On the other hand, the business cycle is not dead and this recovery is entering its 6th year. When the economy moves back into its recessionary cycle, there is little policy “juice” remaining to moderate it.
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