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 second estimate of 3st quarter 2013 GDP and reports that the overall economy grew by 3.6 percent. This is up sharply from the earlier estimate of 2.8 percent. 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 47 percent of the total increase in GDP. Other than that, investment was up substantially, accounting for 22 percent of the increase, with most of the rest coming from personal consumption expenditures. While it is always good to see a significant percentage of growth resulting from new investments and this case is no exception, the fact that inventory growth accounted for so much of the change is disappointing. In fact, once this stockpiling is taken into account, actual consumption based GDP rose by a modest 1.9 percent, well in line with the slow growth pattern seen over the past few years.
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 -$422 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.
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. Business capital investment was up by $131.3 billion over the same time in 2012, and was up 5.4 percent in the 3rd quarter. On the other hand, growth in residential property investment is up a whopping 13 percent which may be pointing to another housing bubble on the horizon since the number of residential units cannot grow at a much faster rate than population.
Another positive factor has been that the overall share of government spending in the economy has been falling, though it is now reported to have grown slightly in the 3rd quarter. This is all due to more spending from state and local governments, as the Federal government has been retrenching as a percent of GDP following the sequester at the beginning of the year.
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 off interest rates, and even though the Federal Reserve has just begun to trim their controversial Quantitative Easing program, it is still unlikely that there will be significant rate hikes in 2014 (though smaller adjustments in short term rates, including the Federal Funds Rate, should not be ruled out.)
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