Q3 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.

Comments

[Plant the s...:]

Prof McTeer,
My reading of inventories is that they support the level of sales (part of the consumption pie). If consumption were to shrink especially over XMas, will a inventory rebuild become necessary or will existing inventories be sufficient to support existing lower sales.

Oct 30 12:55 PM

[market ace:]

It is only fitting that on the 80th birthday of the great market crash of 1929 that the gov't now thinks they can feed us pure BS and hocus pocus stats to try and avoid a repeat of that fateful day and mask the terrible economic pain being felt on main street

About half the reported growth in GDP came from the expired Cash for Clunkers, government- subsidized, vehicle-purchase plan where they provided significant cash rebates in exchange for consumers buying the cars the Central Planners wanted folks to buy. Most of the rest of the GDP growth came from increased government expenditures, which were up 7.9 percent. This is a great number for socialists; however, for households, which account for 70 percent of GDP in a capitalist economy, not so great. Households remain stuck in an economic quagmire. Current economic policy appears to be more about the government and Wall Street than the average American household, and 3rd quarter GDP brings the point home in spades.

For the American Household, the deep recession (possible depression) remains firmly intact. Present and future cash needs remain a fearful proposition in the wake of rsing unemployment and lack of income from every investment source.

Oct 30 01:27 PM

[Mad Hedge F...:]

ndu A few years ago, I went to a charity fund raiser at San Francisco’s priciest jewelry store, Shreve & Co., where the well heeled men bid for dinner with the local high society beauties, dripping in diamonds and Channel No. 5. Well fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area’s premier hotties, who shall remain nameless. Suffice to say, she has a sports stadium named after her. The bids soared to $6,000, $7,000, $8,000. After all, it was for a good cause. But when it hit $10,000, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer’s remorse came to me and offered his date back to me for $9,000. I said “no thanks.” $8,000, $7,000, $6,000? I passed. The current altitude of the stock market reminds me of that evening. I have just had one of the best years of my career, and have cashed out of most of my positions so I can greedily await payment of my year end performance bonus. If you rode gold from $800 to $1,050, oil from $35 to $80, and the FXI from $20 to $40, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it does now? I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands. But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: “There is a time to fish, and a time to hang your nets out to dry.” At least then I’ll have plenty of dry powder for when the window of opportunity reopens for business. One of the headaches in writing a letter like this is that while I publish 1,500 words a day for 250 days a year, generating about half the length of War and Peace annually, you really need to tinker with your portfolio on only a dozen or so of those days. So while I’m mending my nets, I’ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again. And no, I never did find out what happened to that date.

Oct 30 01:27 PM

[Tony Petroski:]

The madman weighs in again.

There's a reason he did not go out on that date and there's a reason he lives in San Francisco.

Oct 30 02:16 PM

[Carl Spackler:]

Just like fundamentals did not mean anything when the market was at S&P 666 in March (fundamentals were horrible), they don't mean much right now. What drove the market then and now at these critical points is the behavior of the herd. You can be fundamental right at the moment and still lose your rear for several months. Remember oil at $150? Great fundamentals there. Peak Oil Theory will end up being right, but the herd got ahead of itself and eventually the party ended for Oil. At extreme valuations, statistics validate that the logic of the herd will trump the fundamental logic.

Oct 30 05:26 PM

[Lebarjo:]

It's big of you, as a free market fundamentalist, to admit that GDP growth is actually a good thing, McTeer. There are a lot of disappointed people on this site.

Oct 31 08:32 PM