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-- Bill Northlich

Thursday, October 27, 2011

3Q GDP Improves Dramatically

The Bureau of Economic Analysis's (BEA) first ("Advance") estimate of third quarter 2011 U.S. Gross Domestic Product (GDP) was reported to be 2.46%, nearly twice the rate reported for the second quarter. The improvements were broadly spread across all sectors of the economy, with consumer goods and services showing the greatest strength. Even the contraction in governmental spending that had been a fixture of the prior three quarters subsided, and the increasing rate of inventory draw-downs indicates that supply chains were struggling to keep up with consumers.

Among the notable items in the report:

-- Aggregate consumer expenditures for goods flipped from prior quarter contraction (-0.38%) to slight growth (now reported to be +0.35%).

-- The growth of consumer expenditures for services was substantially stronger during the quarter, at an improved (yet arguably still modest) 1.38% annualized growth rate. Between them, the consumer improvements in expenditures for both goods and services were large enough to generate the entire growth in the headline number.

-- The growth rate of private fixed investments was also reported to be improving, with the annualized growth rate now reported to be 1.60%.

-- The draw-down of inventories accelerated during the quarter, indicating that production has lagged demand. This change may be a good sign for the overall health of the economy, and the lower inventory levels may signal the need for increasing factory activities in the near future.

-- Total expenditures by governments at all levels flattened out, breaking a string of three prior quarters of contraction. The changes were primarily at the state and local levels, where "consumptive expenditures" (i.e., operating budgets) continued to shrink but were offset by increasing investments on infrastructure.

-- Exports strengthened slightly relative to the second quarter, raising the contribution that they made to the overall GDP growth rate to 0.55%.

-- Imports also increased somewhat when compared to the prior period, and are now removing -0.34% from the growth rate of the overall economy. The combination of the revisions in the import and export numbers nearly offset each other and made a miniscule -0.03% downward change in the published headline number.

-- The annualized growth rate of "real final sales of domestic product" was sharply higher at 3.54% -- more than double the 1.62% annualized rate recorded for the second quarter. This was the result of the higher consumer expenditures for both goods and services, and the increased draw-down of inventories.

-- Working backwards from the data tables, the effective "deflater" used by the BEA to offset the impact of inflation was 2.52%, essentially unchanged from the second quarter. In a significant shift from prior reports this number is higher than similar data from the BEA's sister agencies -- which have more tightly tracked the impact of gasoline and grocery costs over the past year and a half. Substituting the line-item appropriate (CPI or PPI) current inflation rate published by the Bureau of Labor Statistics (BLS) causes the "real" GDP growing at a 2.94% annualized growth rate, slightly higher than the headline rate. This reverses two prior quarters where a BLS price-deflated GDP was actually in contraction.

-- The only really negative data in the report relates to per-capita disposable income, which was reportedly shrinking at an annualized -1.7% rate during the third quarter (and a -2.32% annualized rate using the BLS CPI as a deflater). This one line item largely explains the mood of the general public, since these per-capita numbers are what impacts individual Americans and are the real source of the frustration within the populace.
---Consumer Metrics Institute

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