For better or worse, gross domestic product (GDP) is how we measure the economy. It is the barometer used to measure growth for economic expansion and to track contractions that make up recessions. In many ways, it is far more important than the official unemployment rate.
And now we have our first estimate for third-quarter GDP at a reading of 3.0%. The Bloomberg consensus estimate was just 2.5%, with an EconoDay range of 1.9% to 2.9%. The Wall Street Journal (Dow Jones) had a consensus estimate of 2.5% for third=quarter GDP.
What will matter the most here is not just that this was a beating of estimates on the economy. This followed the second-quarter GDP rate of 3.1%. Perhaps the key takeaway for investors, economists, business owners and workers is that even in 2016 the United States had seen 10 consecutive years with GDP growth of less than 3%. Real GDP growth has not seen two consecutive quarterly growth rates of 3% or higher since 2014.
The Bureau of Economic Analysis reported that current-dollar GDP rose by 5.2%, a gain of $245.5 billion, to a level of $19.495.5 trillion in the third quarter. In the second quarter, the current-dollar GDP level rose by 4.1%, or $192.3 billion.
The GDP price index, which counts inflation in the mix, showed a 2.2% reading and the real consumer spending change was 2.4%. The price index for gross domestic purchases was up 1.8% in the third quarter, after rising 0.9% in the second quarter. The personal consumption expenditures (PCE) price index increased by 1.5%, and excluding food and energy, the PCE price index rose by 1.3%.
Two issues should stand out in these sub-index readings. The first is that the Federal Reserve really wants inflation up at 2.0% to 2.5% — so this would indicate a success here, and it may justify continued interest rate hikes in December and into 2018. The second issue is that if consumer spending accounts for about two-thirds of GDP in the United States, then consumers appear to be feeling good heading into the almighty fourth quarter.
Rising inventory levels did play a factor here, but that is ahead of the fourth quarter and it also was certainly tied to two major hurricanes hitting the continental United States. Some of this build also may be tied to transportation delays and backups in the supply chain.
With personal consumption so strong, it accounted for strong gains along with the durable goods strength we reported earlier in the week.
One area of weakness was in residential investment, but this may see a snapback after many of the numbers work their way into the economy in October and November spending after reimbursement checks have been cut to homeowners after the storms.
Nonresidential investment was up and net exports rose for a positive GDP contribution. Federal government spending was up, while state and local government spending were down. Imports (which are a subtraction in the calculation of GDP) decreased in the third quarter.
Other key factors in this report were shown as follows:
- Disposable personal income increased $73.6 billion, or 2.1%, in the third quarter, compared with an increase of $125.1 billion, or 3.6%, in the second quarter.
- Real disposable personal income increased 0.6%, compared with a prior increase of 3.3%.
- Personal saving was $494.8 billion in the third quarter, compared with $545.6 billion in the second.
- The personal saving rate (personal saving as a percentage of disposable personal income) was 3.4% in the third quarter, compared with 3.8% in the second.