PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

The Full Third Quarter Growth Story, and the Investment Shortfall

By at 31 October, 2014, 7:39 am

by Raymond J. Keating- 

The topline story on U.S. real economic growth in the third quarter was a good one, based on data released by the U.S. Bureau of Economic Analysis on October 30.

Annualized, seasonally adjusted real GDP grew by 3.5 percent in the third quarter. That came after 4.6 percent growth in the second quarter, and a big 2.1 percent decline in the first quarter.

The hope is, of course, that growth during this recovery will finally step up and be sustained at a level far closer to where economic recoveries normally run (in the range of 4.5 percent growth).

Unfortunately, there are some continuing reasons for concern in this latest quarter of data.

Raymond Keating, Chief Economist of the Small Business & Entrepreneurship Council reviews the latest GDP data released by the government.

Raymond Keating, Chief Economist of the Small Business & Entrepreneurship Council, reviews the latest on GDP data reported by the federal government.

First, real personal consumption expenditures expanded by 1.8 percent. That was a marked slowdown 2.5 percent in the third quarter.

Second, real gross private domestic investment slowed dramatically, from 19.1 percent in the second quarter to a mere 1.0 percent in the third, including a slowdown from 9.5 percent growth to 4.7 percent growth in fixed investment.

Third, U.S. real imports in the third quarter actually declined by 1.7 percent. That was the first decline since the first quarter of 2013. While some might view this as a positive, it most certainly is not, as imports provide information about domestic consumption and private investment.

Fourth, a fairly significant chunk of third quarter growth was due to a large increase in government consumption and investment, which was up by 4.6 percent. Therefore, of the overall 3.5 percent growth rate, government contributed 0.83 percentage points. That was the second largest contributor to growth among the four major GDP categories of consumption, private investment, trade and government. When we back the government numbers out, it turns out that private sector GDP growth came in at 2.7 percent.

Fifth, the largest contributor to GDP growth in the third quarter was U.S. exports. Although export growth slowed from 11.1 percent in the second quarter, it still came in at a solid 7.8 percent in this last quarter. That contributed 1.03 percentage points to the 3.5 percent overall growth rate.

Looking ahead, in order to achieve the sustainable, strong growth that has avoided the U.S. for many years now, we certainly should not rely on government spending and investment (which actually raises serious questions about the quality of GDP growth, as it is not market driven growth), and must experience a robust increase in private investment.

It is critical to recognize that real gross private domestic investment in the third quarter of 2014 was still below the high hit in the first quarter of 2006 – specifically, down by 2.3 percent. That’s a stunning, unprecedented situation (outside of the Great Depression), and speaks to the lack of strong growth in the U.S. over the past nearly eight years.

Of course, if we want to see growth-generating investment in new and existing businesses, then we need to see a dramatic shift in federal policymaking, away from measures that raise costs for risk taking to policies that reduce costs and enhance incentives for such risk taking.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

Keating’s new book published by SBE Council is titled Unleashing Small Business Through IP: Protecting Intellectual Property, Driving Entrepreneurship and available from Amazon.com here.

 

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