The Bureau of Economic Analysis announced that real gross domestic product (GDP) rose 2.0 percent in the third quarter. This was just slightly above the consensus estimate of 1.8 percent growth and higher than the 1.3 percent increase observed in the second quarter.
There are three big differences between the second and third quarters. First, the consumer – which was more skittish in the second quarter – increased spending in the third quarter. We have seen this in other indicators including recent data on retail sales and personal spending.
The contributions from durable and nondurable goods consumption in the second quarter were negligible and disappointing, with just 0.08 percent of the 1.25 percentage points of growth. In the third quarter the contributions were 0.63 percent for durable goods and 0.40 percent for nondurables, or 1.03 percent in total. That means that half of the growth in the third quarter’s GDP number stemmed from goods consumption.
The second difference between the second and third quarters can be seen in service sector consumption and private investment. Both of these were the largest drivers of growth in the second quarter. Service sector consumption added another 0.39 percentage points to growth, a falloff from the 0.99 percent added in the second quarter.
Fixed investment’s contribution fell from 0.56 to 0.20 percentage points between the quarters. Investment in equipment and software was unchanged, providing no contribution, and construction of new structures fell. Inventories were also lower in the third quarter. One bright spot in this category is residential investment, as we have seen in the latest housing numbers.
Third, the government sector added to GDP in the third quarter for the first time since the second quarter of 2010. This gain stemmed from the federal government sector, with defense spending up 13.0 percent and nondefense spending 3.0 percent higher. State and local government spending was down just 0.1 percent, an improvement from previous quarters. Overall, government spending contributed 0.71 percentage points to GDP.
Outside of the weaker business spending numbers, the other big disappointment involved international trade. Given recent slowness in the global economy and the latest data on the trade balance, this was expected. Exports of goods were down 3.5 percent in the third quarter, falling faster than the 1.3 percent decline in goods imports. The net result was a negative contribution of 0.18 percentage points to GDP for the net exports of goods and services.
The third quarter GDP numbers confirm that the U.S. economy is growing modestly, with 2 percent growth becoming the new normal. Stronger spending on consumer goods, housing, and defense were positives that lifted our economy from the weak 1.3 percent growth rate of the second quarter. Yet, the impact of headwinds on the global and domestic economy cannot be minimized as business investment was flat or falling and goods exports were down. It is clear that manufacturers are feeling the impact and uncertainty about the future direction of the economy is hampering growth.
Earlier today, the NAM released a study titled “Fiscal Shock: America’s Economic Crisis.” The report finds that the fiscal cliff is already having an impact on the economy, cutting 0.6 percentage points from GDP already in 2012. The impacts in 2013 and 2014 are even more severe, and it could take most of the decade for economic activity and employment levels to recover. This should serve as a serve as a wake-up call for policymakers to quickly address the fiscal cliff.
Chad Moutray is chief economist, National Association of Manufacturers.
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