U.S. GDP Revised Downward: Expansion Phase Begins?

by: Ed Dolan

The third estimate of U.S. real GDP for Q3 2011 brought yet another downward revision. Can we blame the Grinch who Stole Christmas?

GDP is now reported to have grown at an estimated 1.8% annual rate in Q3 2011, less than the 2.0% second estimate released in November and less still than the 2.5% preliminary estimate reported in October. Although slowing, the July-September 2011 quarter was the 9th consecutive quarter of growth since the end of the recession that lasted from December 2007 to June 2009.

Even after the revision, Q3 GDP was still above its pre-recession peak reached in Q4 2007, although only by a razor-thin 0.04%. According to standard business cycle terminology, the recession phase of the business cycle is the downward movement of GDP from its previous peak. The recovery phase is the upward movement from the trough (low point) of the recession and continues until GDP again reaches its previous peak. Once GDP moves above its previous peak, the expansion phase begins. The revised Q3 data still suggest that after a recovery of 2 years duration, the expansion phase has now begun.

Consumption was revised downward but still accounted for much of the growth in Q3. Investment was revised up to weakly positive compared with the negative number in last month’s second estimate. Federal government defense spending grew but was offset by continued decline of federal nondefense spending and state and local government spending. Exports grew even more strongly than previously reported, but they were offset by an upward revision of imports (a negative entry in the GDP accounts).

The revised growth of nominal GDP (NGDP) was 3.9% in Q3. NGDP growth consisted of 1.8% real growth and 2.1% inflation. An increasing number of economists focus on NGDP growth as a key policy target. Over the long run, NGDP growth of about 4.5% would allow real GDP to track its potential level with about 2% inflation. The Q3 NGDP growth of 3.9% suggests that the gap between actual and potential GDP that opened during the recession continued to widen.

Follow this link to view or download a classroom-ready slideshow presentation of the latest GDP data.