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GDP Pace Surprises Everyone

November 7, 2017

 

L:  Jim wrote this a few days ago, but then our trip to Arkansas intervened (all our trips are business+pleasure) so I'm posting it late.  Fortunately, it's still relevant!  (Guess he needs to get better staff.)  ;-)

 

J:  On October 27 the BEA surprised us all with the news that real GDP grew at a seasonally adjusted annual rate of 3.0 percent in the third quarter of 2017.  Coming after the 3.1 percent pace in the second quarter of 2017, that marked the first time we have seen growth of 3.0 percent or more for two consecutive quarters since the third quarter of 2014.

 

If we beat that 3.0 percent threshold in the fourth quarter, which is my forecast but not the consensus, that would be the first time since the first quarter of 2005 that such a stretch of growth occurred. That marked the end of a four-quarter stretch of such growth.

 

The level of real GDP in the third quarter was $17.2 trillion.  That was up 2.3 percent from the same quarter a year before.  That was the best year-over-year increase since the 2.4 percent of the third quarter of 2015.

 

The consensus of the 71 forecasters surveyed by Bloomberg on October 6-11 for the third quarter was for only 2.3 percent real GDP growth.  My prediction then was 3.3 percent, but my confidence in that was not very high given the anticipated impacts from Hurricane Harvey in Houston and Hurricane Irma in Texas.  Puerto Rico is not included in this GDP report, so the devastation from Hurricane Maria there did not affect the report.

 

Real personal consumption expenditures (PCE) were $11.9 trillion in the third quarter.  They accounted for 69.5 percent of real GDP and rose 2.4 percent from the second quarter.

 

That was enough to contribute 1.62 percentage points to the overall 3.0 percent growth rate.  The other big contributor was gross private domestic investment, which added 0.98 percentage points to the growth rate.

 

L:  What IS private domestic investment?

 

J:  It's what private-sector organizations spend on structures, computers, software and other equipment, R&D, and inventories.  

 

The lion’s share of that came from a 0.73 percentage point contribution from the change in private inventories.  If this was because businesses were trying to catch up with rising demand, then it was a good reason.  If it came from excessive optimism of retailers wanting to have goods on hand for expected demand that does not materialize, then it is bad news.

 

We’ll find out which it was when the first (“Advance”) release on the fourth quarter is published by BEA on January 26, 2018.  That release will also tell us if we’re experiencing the best sustained growth period since 2004-2005.  Be watching.

 

The chart shows the quarterly growth rate of real GDP since 1995.  You can clearly see the four consecutive quarters of 3.0 percent growth or more in 2004-2005.

 

 The average annual growth rate of real GDP from 1929-2016 is 3,1 percent a year.  We have not seen a year that good since the 3.3 percent in 2005.  We have a good chance of beating that in 2018.

 

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