GDP Growth Returns in Q3

As expected, the economy grew at a healthy pace in the third quarter, expanding at a 3.5% annual pace according to this morning’s data from the Bureau of Economic Analysis.

Among the highlights:

• Consumer spending grew at a 3.4% pace, the fastest since the first quarter of 2007. A substantial fraction of that growth reflects vehicle purchases, which were temporarily boosted by the cash-for-clunkers program.

• Residential investment grew for the first time since late 2005, driven in part by the tax credit for new homebuyers.

• Imports rose for the first time in two years. Most of that increase came from goods, which is consistent with the idea that auto imports increased in response to cash-for-clunkers.

You may notice a trend here, as government policies had a significant effect on the pattern of growth in the third quarter.

As I’ve mentioned before, I think one of the best ways to understand the pattern of growth is to look at the contributions that each major sector made to the overall growth rate:

As you can see, consumers, inventories, and exports were the main drivers of Q3 growth, while imports were the main drag.

Q3 represents a striking change from Q2 (shown in the next chart), when the economy contracted at a 0.7% pace and private spending was weak across the board:

Note: If the idea of contributions to GDP growth is new to you, here’s a quick primer on how to understand these figures. Consumer spending makes up about 70% of the economy. Consumer spending rose at a 3.4% pace in the third quarter. Putting those figures together, we say that consumer spending contributed about 2.4 percentage points (70% x 3.4%, allowing for some rounding) to third quarter growth.

Comments

[bobdark:]

I have a hard time seeing how this growth can continue into Q4 since demand for autos is now less as an after-effect of cash-for-clunkers and I think most of the increase from the housing credit was in Q3. So, what's left to keep this up for Q4 this year and Q1 next year?

Oct 29 06:54 PM

[Options Tra...:]

Real GDP is a volatile number and seasonally driven. I won't be surprised nor concerned if Q4 couldn't keep up. All I am concerned about is the trend, the direction of growth of GDP in general and so far, it has been up, in line with the world economic recovery scenario.

Oct 29 10:10 PM

[Kimball Corson:]

Are you saying that if the cash for clunkers program and the tax credit for new homebuyers, and their effects, were factored out, GDP growth would only drop by .5% to 3.0%. I believe that if the stimulus program effects and the effects of the two gov

Oct 30 02:34 AM

[Kimball Corson:]

erment programs you identify were factored in, real or true GDP grow would be on the order of 1.5%, not 3.5%. I do not believe for a heart beat that the government contribution to the 3.5% was only .5%.

Oct 30 02:36 AM