An In-Depth Look at the GDP Report
The long awaited report is out.
Let's start with the basics:
The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
Here's an important point: yes, cash for clunkers was a big reason for the increase. But there were other contributors as well.
Real personal consumption expenditures increased 3.4 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second. Durable goods increased 22.3 percent, in contrast to a decrease of 5.6 percent. The third-quarter increase largely reflected motor vehicle purchases under the Consumer Assistance to Recycle and Save Act of 2009 (popularly called, "Cash for Clunkers" Program). Nondurable goods increased 2.0 percent in the third quarter, in contrast to a decrease of 1.9 percent in the second. Services increased 1.2 percent, compared with an increase of 0.2 percent.
Yes, the cash for clunkers program was a big goose. But notice it wasn't just durable goods that saw increases: non-durable goods and services also increased. And not by small amounts. Also note the durable goods purchases by consumers only comprise 12% of PCEs. Services are by far the biggest component of PCEs, coming in at 65.7%. And non-durable goods comprise 21.9% of purchases. That makes the 1.2% increase in services and 2% increase in non-durables very important. The increase was broad-based.
Real nonresidential fixed investment decreased 2.5 percent in the third quarter, compared with a decrease of 9.6 percent in the second. Nonresidential structures decreased 9.0 percent, compared with a decrease of 17.3 percent. Equipment and software increased 1.1 percent, in contrast to a decrease of 4.9 percent. Real residential fixed investment increased 23.4 percent, in contrast to a decrease of 23.3 percent.
This is more good news for two reasons.
1) The rate of decline of non-residential fixed investment dropped at a smaller rate. We saw a slight increase in equipment and software investment.
and
2) Residential investment increased at a strong rate. Now I'm guess that some of that increase is the result of coming off a low bottom. But not all.
Real exports of goods and services increased 14.7 percent in the third quarter, in contrast to a decrease of 4.1 percent in the second. Real imports of goods and services increased 16.4 percent, in contrast to a decrease of 14.7 percent.
While imports increased at a larger rate than exports, exports were still up 14%. That tells us that our trading partners are buying things -- meaning they are recovering. The increase in imports indicates we're recovering.
Let's look at the GDP report from a different angle -- the percentage increase and what each component of GDP added to GDP growth.
First, GDP increased 3.5%.
Durable good sales added 1.01 of the 3.5% or 29% of the total increase. That number is the result of C4C. That number is also highly unusual -- meaning it is way out of the ordinary. The highest that number had been since the 4Q05 was .46 -- and that number was also out of the ordinary. Suffice it to say we're not going to get a goose like that from this number again.
Non-durable goods added .31 and services added .57. So combined these two other areas of growth were responsible for .88 of GDP growth, or 25%. This is why the broad based increase in PCEs (mentioned below) is so important. While car sales were a reason for the increase, they weren't the only reason.
Gross private domestic investment added 1.22 to the 3.5. The big movers there were positive contributions from the change in private inventories and increases in residential investment.
While exports did increase, imports also increased meaning we're back to imports subtracting from growth.
That leaves government spending which added .48 to the 3.5.
While C4C was a boost, it wasn't the only are that helped. There were other reasons for the increase.
Short version: this is a very good report.
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In all honesty I am not sure what the term "good numbers" means anymore. Economics has struggled to be both science and psychology. One must ask what about our current context makes these numbers "good." Ideologically speaking unregulated capitalism has proven a failure regardless of its size. Until we replace unregulated capitalism with something different the numbers are meaningless because they do not describe the world as it is - we have a broken economy held up only by the taxpayers subsidizing themselves and banks so that consumption does not entirely stop. The irony here is that we are attempting to prop up an unregulated capitilist system by employing socialist manuevers.
The economy grew because #1 cash for clunkers resulted in an increase of consumer spending, production, and inventory rebuilding, and #2 because of the $8000 first time home buyers tax credit which almost solely contributed to the increase in residential investment. The growth in exports was more than negated by the growth in imports (trade was a negative to growth). Most of the remaining growth was from the govt fiscal stimulus. The increase in consumer spending had a lot to do with the quarter on quarter sequential increase in equity prices and home values resulting from the money printing policies from the Federal Reserve that have kept rates artificially low.
For the next quarters, the cash for clunkers is over, the $8000 homebuyer tax credit is over but might be extended, the fiscal stimulus has about 40% left, and the Fed treasury purchase program is over and the Fed mortgage backed securities program runs 'til March. So we have a little growth left in the economy. After that, who knows? It could be 1938 all over again.
Increased debt from consumers. You buy a car or house you get locked into (jailed), a financial product. Sentence term anywhere from 3-7 for the car and 15- what are we up to now for creative home purchasing financial products 50 year loans?
Jobs historically lag recovery by a couple quarters at least, and for most folks another year of struggling to find work or keep their job will pass befgore ANY 'confidence' in OUR economy returns. For investors though, it should signal some steady growth returning to the market, somewhat tempered by another slow holiday season for many mass-merchandise retailers. Focused niche retailers with an existing customer base should do far better than 'too big' stores during the upcoming holiday season, as gift buying likely also stays more focused.
Thank you, Hale, your analysis helps validate my decision to continue keeping 'a portion' of my 401K retirement investments at risk in the market, and see where the next couple of quarters go. I'm holding hope that circumstances and health still allow me to have a retirement. Time will tell ...on ALL things.
People have no chance but to risk their savings in the stock market. Also buying some gold and silver are probably good ideas. Savings accounts are paying less than 1% and inflation is higher than this.
Our government is taking the USA dollar out back and putting a bullet through its head. I suspect the government is going to hit the brakes when gasoline prices start rising, this will crash the markets, and then the government will really start the printing presses running printing dollar bills to try to get the economy revved up again.
So I expect a major crash followed by hyperinflation.
One more thing, if all the production in the world is now driven by government spending - does it occur to anyone at all that at some point the poor taxpayers will simply not be able to "Flip" the bill?
There is no spending occurring, who doesn't get this??
The credit markets are completely frozen. No I'm not talking about mortgages. I'm talking about commercial credit. Billions of sales are not going through because the customers have no credit left.
You cannot sustain this.
If Bernanke is the only guy buying anything then we are in very big trouble.
Saudi Arabia cancelled their West Texas Crude scam and are now accepting anything other than US dollars for their oil.
What does that tell you Bonddad?
This article is the summation of the last six months of economic rebound. Looking at a host of numbers one finds that consumer spending had fallen about 10% from its pre-recession levels and that production had fallen about 20% at the trough. Neither is back to those levels but production has risen in part to make up for its overshoot on the way down. Consumer spending has been bolstered by the stimulus tax cuts and incentive programs.
Unfortunately no real change has been made to the economic recipe. We still have an economy based on consumers spending about 10% more than they earn. Except for Government giveaways and exports there is little in the pipeline for growth. Even the anemic home construction level is bordering on over supply. Commercial real estate is still dropping and the banks holding the notes are sweating bullets. Initial claims for unemployment are stuck at recessionary levels and jobs are still being lost.
The next quarter will be telling. We have recently seen a slight downturn in consumer confidence, home sales and the Chicago Fed Index. Other indices are holding their own. The question again is can the economy become self sustaining before the Government's credit runs out? Can the financial system function without the Fed printing money to keep it afloat? The Obama Administration grossly underestimated the damage and dispatched its limited resources to maintain the unproductive vestiges of the past Administration, Wars, tax cuts, bailouts and inflated home prices.
"Unfortunately no real change has been made to the economic recipe."
That is, as Frank Zappa would say, "the crux of the biscuit".
I'd really like to feel a great swelling of optimism, yet I feel in these numbers and analyses the death throes of the system of crony capitalism with nothing substantial to replace the vacuum as consumer debt has exceeded its limits, cash cows (perceived retirement fund gains, housing appreciation) deflate and no solid economic base exists in a society where jobs and manufacturing have been exported to seek the cheapest labor. There's a lot of fixing to do, and little apparent wherewithal to even address fundamental structural matters.
swift boat goat for truth. Since early 1980's our government has been changing assumptions and other criteria to message the data in hiding the melancholy statistics of our economic decline. The distortions have become so egregious that they are unreliable for making policy.
in a declining organization the knowledge available for decision making is less reliable and valid, that is, the empirical data has been messaged while the theorietical underpinning ideas of policy favor powerful interest groups while ideas of the general interest are ignored, suppressed or denied.
In a declining organization self-denial is made credible by unreliable and toxic knowledge that is the basis for ineffective or even harmful policy and procedure. The Obama administration's financial-economic policies originate from self-serving empirical data, assumptions and ideas.
In a self-sufficient, growing, thriving organization the truth is consciously pursued and demanded by honorable and courageous leadership at all levels of the organization. (The truth is recognized as above all other considerations in arriving at decisions.) More valid and reliable knowledge and empirical data are applied to making policy directed toward outstanding performance and achievement of all members of the organization.
I do not have any confidence in the GDP numbers .
Would you care to share your source of confidence?
Read comment again.
Great. Now when can I have a job?
When the great driver of modern economies, the middle class, gets some disposable income.
In other words, when the rich start to share.
There's still no forecast for frost in Hell, sorry.
The rich will share when congress receives the inescapable message that widespread unrest will result from further dalliance. It may take some time yet, while we are fed a diet of false hope for political expediency and business as usual.
The grim reality is the important fact that this economy and country are rapidly declining. Playing with percentages mean not a whit. Samuel Clemens was right that in the wrong hands it is true that "There are three kinds of lies: lies, damn lies and statistics." Those Americans cheering at seeing our climb out of depression are deluding themselves and others they influence.
I study history as well as economics and the rise and fall of empires. One quarter of messaged statistics mislead the people for even more alarming disappointment and futilitarianism. This country has no program or strategy to turn in a new direction of national growth and opportunity. Without rational policy the only course for leadership are words of promise and hope. Meanwhile, the smell of stagnation and decay are everywhere around the organization. And the people are losing in confidence, knowledge and skill.
"One quarter of messaged statistics mislead the people for even more alarming disappointment and futilitarianism. "
Still, one quarter of massaged statistics is better than a poke in the eye with a sharp stick.
If this quarter's stats have been cooked, what about last quarter? and the quarter before that?
Do you think last quarter's was legit? or was it cooked to the same degree?
Did they run three legit quarters, then cook this one?
It is one thing if they used the same pot in which to cook, another if they did not.
I predict a massive crash in all of your beloved economic indicators within the next two years.
The government is making the same mistakes that it made after the 2001 market crash but this time in hyper-drive.
Thanks Bonddad, I see New Deal Democrat @ DK took over your financial postings (his post looked like a slightly shorter version of your usual).
I worry more about the manipulation of the some of the data that is reported, not your analysis of it.
Assuming the data is correct (ie. not manipulated), it looks like the ship is turning, and hopefully job creation will start to pick up next quarter if GDP shows another increase YoY
So in other words, the Goopers can stop blaming Clinton, and start trying to take credit for the turn-around.
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