First Estimate of Third Quarter Data

The Bureau of Economic Analysis (BEA) reports real gross domestic product (GDP) grew at a 2.9% annualized rate in the third quarter, beating expectations.  This was a welcome improvement compared to the sluggish 0.8% and 1.4% growth in the first and second quarters, respectively.  The Atlanta Fed’s GDPNow forecasted 2.1% growth. The Wall Street Journal expected 2.6%, and Wells Fargo expected 2.2%.

                                                    Sources: BEA, Haver Analytics, Atlanta Fed, Blue Chip, Wells Fargo Economics Group.
                                                    *Note: Post-1960 recovery average from recessions lasting longer than 1 year, excludes current recovery.

In December 2015, the Federal Open Market Committee (FOMC) forecasted 2.4% real GDP growth for 2016.  In March, it revised this to 2.2%, and in June, it lowered its forecast to 2.0%.  In September 2016, it was revised even lower to 1.8% growth.

 

Context

Accelerating GDP growth resulted from rising exports, smaller declines in state and local government spending, and rising federal spending and private inventory investment—broadly in manufacturing, retail and wholesale.  Prior to this quarter, private inventories negatively affected GDP growth for the previous five consecutive quarters.

• Soybeans were a surprise driver in exports in the third quarter.  A poor soybean harvest in the southern hemisphere led to strong demand for U.S. soybeans.
• Many states have not seen their tax revenues fully recover from the recession, and have worked to maintain balanced budgets.  As a result state and local investment spending on projects, such as highways and police stations, has declined.  However, while investment continued to contract, the drop is less severe than in previous quarters.

Third-quarter data has two revisions remaining before its final estimate.  The first estimate of second-quarter real GDP growth was 1.2%, but it was then revised downward to 1.1% and ultimately revised up to 1.4% in the final estimate.

 

The Bigger Picture

Despite the relatively higher first estimates of third-quarter GDP, growth remains far from robust.  Quarterly real GDP growth (at annualized rates) failed to top 3.0% for the last two years, while annual real GDP growth hasn’t exceeded 3.0% since 2005.

• Business investment continues at a relatively muted pace over the course of the current recovery.  Among small-business owners surveyed, only 8 percent indicated that it is a good time to expand in this recovery compared to roughly double that in the 2000-2007 period.
• Startups continue to grow at a historically slow pace as well.  The share of businesses less than one year old halved to 8 percent in 2010 (the most recent data) compared to a larger share seen in the late 1970s.  In recent years, job growth has increasingly shifted away from startups toward established organizations.
• Private payroll job growth has also continued to slow this year as its average monthly gain fell below 200,000 to 162,000 thus far in 2016.  This is sharply weaker than average monthly gains in the 2011-2015 period.
• Although most analysts don’t expect a federal funds rate increase in November, many predict that the FOMC will raise rates during its December meeting, even in the absence of stronger economic growth.
• Given slower productivity growth since the recession, St. Louis Federal Reserve Bank President James Bullard recently emphasized that the Fed cannot provide sustainable long-term economic growth: “Monetary policy can only pull some growth forward (e.g., when the economy is in recession) in exchange for less growth in the future.”  This implies that additional monetary stimulus would not solve the current slow-growth problem.
• Stronger economic growth yields higher living standards at a faster pace. However, given the aging populations among most industrialized countries, slower economic growth trends are more likely without robust productivity growth.  Furthermore, a relatively smaller share of workers spells trouble for sustaining larger numbers of retirees.

 

Third Quarter Details

Some notable details reported in the BEA release:

• Positive contributions occurred in personal consumption expenditures, exports, private inventory investment, federal government spending, and nonresidential fixed investment.
• Negative contributions resulted from rising imports and declines in residential fixed investment and state and local government spending.

If the third-quarter estimate of 2.9% remains unchanged in subsequent revisions, the average growth rate for the first three quarters of 2016 will equal 1.7%, and it would take growth of at least 3.3% in the fourth quarter to match even the paltry 2.1% average annual growth rate of this recovery for the year.

 

Economic Indicators

The following table shows a sample of data which measure economic activity during the third quarter.  These data are often used to forecast GDP growth before the end of a quarter.  Some of September’s data is not available yet.

                                                          Source: Haver Analytics.

 

Key Upcoming Releases

• November 3^rd, 8:30am: Second-quarter GDP by industry
• November 29^th_, 8:30am: Second estimate of third quarter GDP data
• December 7^th at 8:30am: Second-quarter GDP by state
• December 22^nd at 8:30am: The third and final estimate for third-quarter GDP
• The BEA release dates for the annual and fourth-quarter data for 2016:
  • First estimate: January 27, 2017
  • Second estimate: February 28, 2017
  • Third estimate: March 30, 2017