Slow Economic Growth Continued in Third Quarter

By October 29, 2010Economy

Today’s Commerce Department advance report that the economy grew at an annual rate of just 2 percent in the third quarter shows that the recovery continued at a lackluster pace in the three months ending in September. U.S. manufacturing output grew at an annual rate of 4 percent in the third quarter, which is half the pace we saw during the first half of the year. This was due to slower business investment, a downturn in housing and slower export growth in the third quarter.

After temporarily surging by 26 percent in the prior quarter due to the end of the home-buyer tax credit, residential investment dropped in the third quarter, falling at an annual rate of 29 percent. This is clear evidence that the stimulus merely brought forward activity into the second quarter, and confirmed by the fact that housing-related manufacturing activity has slowed in recent months.  In addition, the deceleration in business investment in the third quarter is a sign that firms remain concerned about uncertain federal policy with respect taxes and regulations.  And given the latest report on new orders for capital goods, I would not be surprised if this initial estimate is revised down in later revisions.

 Despite the overall modest rise in third quarter GDP, there were some pockets of encouraging news in today’s report.  First, after anemic growth during the prior three quarters, consumer purchases of services, which accounts for 46 percent of GDP, rose by a solid 2.5 percent in the third quarter, the fastest pace in nearly four years.  If this positive momentum continues in upcoming quarters, it could be a sign that a stronger recovery could be in the making in 2011.  In addition, while today’s report showed that exports grew by a modest 5 percent in the third quarter, this slowdown from the 9.1 percent pace in the second quarter was mainly due to exports of aircraft, which are volatile from month to month and fell off significantly in August.

 Overall, the recovery has continued its recent slowing trend as businesses remain cautious, reacting to the uncertainty created by Washington’s future action – or inaction — on critical issues such as tax and regulation.

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