The Bureau of Economic Analysis said that real GDP grew an annualized 3.5 percent in the third quarter, slightly higher than my forecast of 3.25 percent. This followed a decline of 2.1 percent in real GDP in the first quarter and a gain of 4.6 percent in the second quarter. As such, the U.S. economy grew a frustratingly slow 1.2 percent at the annual rate in the first half of 2014, which was a major disappointment. Still, consumer and business spending strengthened in the second quarter, and we continued to see gains in these areas in the third quarter, albeit with some easing in the pace of growth. In addition, after seeing net exports serve as a drag toward growth in the first half of the year, they were a positive contributor this time around, which was encouraging.
Digging deeper into the data, one of the first things that stands out is the dramatic swings in inventories over the first three quarters. In the first quarter, winter weather reduced overall demand, and as a result, the depletion of inventories subtracted 1.16 percentage points. As more businesses restocked their shelves in light of strong rebounds in activity in the second quarter, inventories added 1.42 percentage points to real GDP. Now, the pendulum swung back somewhat in the third quarter, with inventories reducing real GDP by 0.57 percentage points. This could be the result of a search for a new normal for stockpiles.
Moreover, consumers spent an annualized 3.1 percent more on goods in the third quarter, down from the 5.9 percent increase observed in the second quarter. Consumer purchases of goods accounted for 0.70 percentage points of growth in the third quarter, led by spending on motor vehicles, recreational goods and vehicles and miscellaneous nondurable goods. Total personal consumption added 1.22 percentage points to growth, including 0.52 percent stemming from service-sector purchases.
Business investment decelerated in the third quarter, as well. Fixed investment grew 4.7 percent at the annual rate in the third quarter, down from 9.5 percent in the second quarter. Much of this easing resulted from the drag provided by inventories (see above), but there were also some signs of softness. Equipment spending was a negative contributor to real GDP for the third time in the past four quarters. In addition, residential business spending slowed quite dramatically (up an annualized 1.8 percent in the third quarter relative to 8.8 percent in the second). Overall, though, fixed investment growth was decent, even if we might have preferred stronger data.
On the trade front, net exports made a positive contribution to real GDP for the first time this year, adding 1.32 percentage points. Goods exports rose 11.0 percent at the annual rate; whereas, goods imports decreased by 2.4 percent. This is hopefully a sign that manufacturers are finding better news abroad, which would be heartening, especially in light of recent slowness in the global economy.
Government spending was also higher, adding 0.67 percentage points. The bulk of this increase came from increased defense spending, with the federal fiscal year ending. State and local government purchases were also a positive contributor.
In conclusion, the U.S. economy continues to show signs of strength, with activity rebounding from significant weaknesses earlier in the year. For their part, manufacturers remain mostly upbeat about future demand and production, which bodes well for future quarters. Better export figures would help to further buoy these sentiments. Along those lines, the 3.5 percent growth rate in real GDP was slightly above expectations, with the economy anticipated to grow by 3.0 percent in the fourth quarter.
Still, these data also show that there is room for improvement. While consumer spending and fixed investments provided a boost in the third quarter, the pace of growth clearly slowed from the prior quarter (beyond the swing of the pendulum after such a strong rebound in the second quarter. This included softness in equipment spending and in the housing market, and inventory spending was also a negative. This could be the result of some soft data in August and September for some measures. We hope to see better figures in those categories moving forward.
Chad Moutray is the chief economist, National Association of Manufacturers.
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