Welcome GDP News, But Don’t Get Too Excited

By SBE Council at 26 October, 2023, 3:19 pm

by Raymond J. Keating –

During recovery/expansion periods, the U.S. economy traditionally grows at nearly 4.5 percent on average. However, outside of the pandemic effects, the U.S. hasn’t experienced growth like that in a long time. So, seeing that real GDP (annualized, seasonally adjusted) grew at an estimated 4.9 percent in the third quarter of this year was welcome.

However, if one digs just a bit below the surface of the U.S. Bureau of Economic Analysis third quarter report on Gross Domestic Product, there are reasons to keep one’s enthusiasm in check.

The Positives

The consumer was very strong in the third quarter, with real personal consumption expenditures growing by 4.0 percent.

Real exports continued their rollercoaster ride by growing at 6.2 percent, which came after a decline of 9.3 percent in the second quarter. And the same pretty much went for real imports, which expanded by 5.7 percent in the third quarter after a drop of 7.6 percent in the second quarter.

And after nine quarters of declines, residential investment (i.e., housing) turned positive in the third quarter, up by 3.9 percent.

Unfortunately, that’s about it in terms of clear plusses in this report.

The Negatives

Most troubling was business investment. Real fixed nonresidential investment actually declined by 0.1 percent in the third quarter, which was the first decline since the third quarter of 2021.

The third quarter 2023 data included a decline of 3.8 percent in equipment investment. Nonresidential structures investment slowed dramatically, moving ahead by 1.6 percent. And intellectual products investment continued its long growth trend, but the last two quarters have marked a significant slowdown (+2.7 percent in the second quarter and +2.6 percent in the third quarter while the historical average going back to 1950 is 7.3 percent).

Business investment is vital to current and future growth, so this decline warrants close watching.

Also, a substantial portion of this 4.9 percent third quarter growth rate was attributed to changes in private inventories, which is a transitional measure that turns out to be a wash over the long run. In fact, 1.47 percentage points of the 4.9 percent growth rate was due to inventories.

And then there was a notable increase in government consumption and investment, which was up by 4.6 percent in the third quarter. That contributed 0.8 percentage points to GDP growth.

Indeed, factoring out growth in government consumption and investment over the past four quarters, private sector GDP – that is, GDP less government, which gets at the portion of GDP growth that matters most – grew at only 1.7 percent in the fourth quarter 2022, 1.4 percent in the first quarter 2023, 1.5 percent in the second quarter 2022, and 4.1 percent (again, versus 4.9 percent overall) in the third quarter 2023.

So, is 4.9 percent growth a positive? Absolutely! However, the foundation for this growth remains weak, and it’s likely that the real GDP growth rate in coming quarters will retreat substantially, especially given a federal policy climate that is distinctly anti-growth.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.