US Bureau of Economic Analysis (BEA)
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).
The BEA’s latest estimate for third quarter US GDP showed growth running at an annualized rate of 5.0 percent – a whopping 43 percent difference from the preliminary estimate of 3.5 percent, and is the second above average positive GDP figure after a substantial contraction in the first quarter. The rate of growth is now postulated to be above the 4.6 percent recorded in Q2, and these two quarters together are the best since prior to the recession, and show that the economy is gaining steam. The current expansion began in the 3rd quarter of 2009, so this business cycle is now entering its 6th year. In that time the overall size of the economy has grown at a slower and more volatile rate than following past recessions. A six year period of growth does suggest that the economy is topping out at this point, and it is likely that the US is now on what economist call mid- to late-cycle expansion.
Looking across major categories suggests that recorded growth this quarter is coming from across categories. Nearly every major category used to calculate GDP, personal consumption expenditure, investment and the contribution from changes in net exports, was a positive contributor to recorded growth. The only negative was a reduction in inventories and in real economic terms (rather than the convoluted method used to calculate GDP based on consumption) this is actually a good thing. The one concern is that government spending accounted for about 16 percent (one sixth) of GDP growth and most of this was due to defense spending. In other words, one sixth of reported third quarter growth is due to blowing up stuff in other countries – not necessarily something to hang the future of the economy on. One positive is that private investment in plant and equipment accounted for about 22 percent of third quarter growth, and net exports (or changes in exports less changes in imports) accounted for just under 20 percent. So the types of activities that will generate future benefits represent nearly half of the growth in GDP in the third quarter. Unfortunately, the growth in net exports has not held up in the 4th quarter and that in and of itself will knock about 1 percentage point off of the growth rate at the end of the year.
One area where the economy has not shown much growth has been in wages, and the GDP figures bear that out. Overall, personal income was up just 3.8 percent over the third quarter of 2013, and this is in nominal terms, so income adjusted for inflation is up just about 2 percent. Of this, over one fifth of the growth is due to increases in transfer payments (things like Social Security and government benefits), and another 5.8 percent is from investment income. Interestingly wage growth has been stronger than overall income growth (up about 4 percent) so investors and wage earners are doing better. It is small businesses owners that are taking the brunt of the slow growth in income, with their receipts up just 1 percent after inflation, and since small businesses are the engine for job growth, this is something that should be concerning.
That said, we expect fourth quarter GDP growth, while still strong, will be slightly slower than in the last two quarters, at about 3.0 percent, and should reflect a moderately successful Christmas season, offset by higher imports. Overall, for 2014 as a whole, growth is set to be around 3.0 percent due to the contraction seen at the start of the year.
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