Third Quarter GDP Growth and Importance of Private Investment

By at 27 October, 2017, 4:08 pm

by Raymond J. Keating-

The United States has now experienced, according to the latest data from the U.S. Bureau of Economic Analysis, two straight quarters of at least three percent real GDP growth. That has not happened since the second and third quarters of 2014. The hope is that not only can we get growth above three percent for an extended period, but far stronger given that history tells us that the economy should be growing at better than four percent on average during recovery/expansion periods.

Crawling inside the third quarter data, the numbers actually were a bit mixed.

First, on trade, real export growth was slow – only 2.3 percent growth, which was down from 3.5 percent in the second quarter and 7.3 percent in the first quarter. Even more troubling was the import side, with growth now slowing dramatically over the last year – from 8.1 percent growth in the fourth quarter of 2016 to 4.3 percent in the first quarter 2017, 1.5 percent in the second quarter, and -0.8 percent in the third quarter.

Second, the story was mixed on private investment. Fixed nonresidential investment (business investment) grew by 3.9 percent in the third quarter, which was down from 7.2 percent in the first quarter and 6.7 percent in the second. In the third quarter, nonresidential structures investment actually fell by 5.2 percent.

But at the same time, there was good news in equipment investment (8.6 percent in the third quarter following 8.8 percent in the second quarter) and intellectual property products investment (4.3 percent in the third, up versus 3.7 percent in the second).

Unfortunately, residential investment has now declined in two consecutive quarters, dropping by 6.0 percent in the third quarter and 7.3 percent in second quarter.

It also must be noted that a significant part of the 3.0 percent growth rate came from growth in private inventories, which tend to vary considerably from quarter to quarter and do not reflect long-term investment gains.

In the end, real economic, income and employment growth, now and in the future, rely on private investment. It’s critical to incentivize entrepreneurship and business investment, and those incentives would be enhanced by, for example, reducing income tax and capital gains tax rates, and expanding expensing of capital spending to all businesses. That’s critical to keep in mind as the debate over tax changes continues.


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

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.


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