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 second estimate for third quarter US GDP at an annualized rate of 3.9 percent was above 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 weaker than the 4.6 percent recorded in Q2, but these two quarters together are the best since the last two quarters of 2013 and do show that the economy is gaining steam. The current expansion began in the 3rd quarter of 2009, so this business cycle is now 5 years in the making. In that time the overall size of the economy has grown at a slower and more volatile rate than following past recessions. This is partly due to economic policy, partly due to events in other countries and partly due to exogenous factors such as the instability in the Middle East. A five 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 20 percent (one fifth) of GDP growth and most of this was due to defense spending. In other words, one fifth 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.
The first revision to quarterly GDP also includes estimates of corporate profits. The current recovery has been reflected in rapid increases in equity valuations, which are now at record levels. If the stock market is not a bubble, it should be reflecting growth in corporate profits. The
GDP release suggests that while up 2.1 percent over the prior quarter, third quarter profits are nearly flat when compared to a year ago (up just 0.4 percent). After taxes and other adjustments, they are actually down 7.5 percent when compared with the third quarter of 2013. In fact, quarterly after tax corporate profits in absolute dollar terms are off fairly consistently since 2013’s third quarter, while the stock market continues to rise. This is a cause for concern, and we believe that the asset bubble could be what leads to the next recession.
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. Overall, for 2014 as a whole, growth is set to be around 2.5 percent due to the contraction seen at the start of the year.
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