US 3Q Real GDP: Not All Details Are Bad

The front page of today’s Wall Street Journal features a useful breakdown of the third quarter real GDP statistics. On the negative side, it shows that the strength in consumption spending benefited from various temporary government programs: primarily cash for clunkers and the first time home buyers’ credit. Those will eventually go away.

Showing imports as well as exports is almost a breakthrough since commentators typically focus only on exports as a positive to GDP growth. The chart showed exports as contributing 1.5 percentage points of the total increase of 3.5 percentage points. Fair enough. But it also showed imports subtracting 2.0 percentage points, making net exports (exports minus imports) a net drag of 0.5 percentage points.

It’s important to remember that imports are a subtraction from U.S. GDP numbers because the various categories of spending listed have import components that generate income abroad rather than at home. Imports are subtracted to prevent over counting in those other categories.

A very positive detail is the contribution of inventory investments. Inventories have been drawn down in recent quarters, and I was expecting a boost from some rebuilding of inventories in the third quarter. Instead, the boost came from a slower liquidation of inventories than in the previous quarter rather than a rebuilding. (A smaller minus has the effect of a plus.) The reason this is so positive, in my opinion, is that the rebuilding of inventories and its boost to GDP is still in our future. It will likely boost the fourth quarter GDP number; if not, the first quarter. It’s an ace in the hole.

I find it disconcerting that everyone seems to equate an increase in the GDP number as an end to the recession even though everyone expects employment to continue falling for some time. Falling employment is hardly consistent with a recovery in my book.

One might think me a killjoy for raining on the recovery parade, but I do believe too much positive spin on current numbers sets us up for disappointment in the near future. The stock market, in particular, swings up and down on exaggerated news spin. More realistic interpretation of incoming economic data might help the stock market have a slower, but more sustainable, increase.

But just to be clear: a 3.5 percent increase in the third quarter is a good thing.

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