Q3 Growth Revised Down Again, Now 2.2%

by: Donald Marron

Q3 keeps looking weaker. The original estimate of Q3 GDP growth came in at a healthy 3.5% annual pace. The second estimate was a respectable 2.8%. And this morning, the Bureau of Economic Analysis released its third estimate: an underwhelming 2.2%.

Growth of 2.2% is, of course, much better than the sharp declines in the previous four quarters. But it is still a disappointment.

As usual, I think a useful way to summarize the drivers of Q3 growth is to look at the contributions:

If you compare these figures to those in the BEA’s second estimate, you will see that the latest revision was spread across several categories. Consumption, housing, equipment and software, structures, and inventories were all revised slightly downward.

In principle, the solid growth in consumer spending and housing investment in Q3 should be promising signs, given their previous weakness. However, both were boosted by temporary stimulus efforts. Cash-for-clunkers lifted consumer auto sales in Q3, for example, but we should expect some payback in Q4. Meanwhile, the tax credit for new home buyers helped housing investment record its first increase since late 2005, but some of that may have come at the expense of future housing investment (because potential home owners accelerated purchases when they thought the credit was going to expire; it’s since been extended and broadened).

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 2.9% pace in the third quarter. Putting those figures together, we say that consumer spending contributed about 2.0 percentage points (70% x 2.8%, allowing for some rounding) to third quarter growth.

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