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Initial G.D.P. Reports Show Stronger Growth In The Summer

Economy Heartbeat

The first estimate of Gross Domestic Product growth for the third quarter shows the economy growing at a faster pace between June and September than it had for most of the year:

The American economy moved into a higher gear last quarter, expanding at an annual rate of 2.9 percent and riding continued strength among consumers and a better performance in global trade.

The Commerce Department’s report on the nation’s gross domestic product, released Friday, is the next-to-last snapshot of the overall economy before voters go to the polls on Nov. 8. Americans will also get to gauge the economic fortunes of the nation from the monthly unemployment figures to be released on Nov. 4.

While the pace of economic growth in the third quarter fell well short of previous achievements, the latest data represented a significant improvement from the first half of 2016. Economists also said the gains were probably strong enough to reassure Federal Reserve policy makers that it was safe to raise the benchmark interest rate when they meet in December.

“This is a good, solid number,” said Gus Faucher, deputy chief economist at PNC Financial Services in Pittsburgh. “The economy is growing at a decent clip. Consumer spending will continue to lead growth, and the fundamentals there remain positive.”

For all the quarterly blips, the ups and downs on Wall Street and the back and forth between political parties, the American economy remains largely on the same trajectory since the recovery began more than seven years ago: slow but consistent growth.

The bigger picture has remained remarkably steady since the start of the recovery, with yearly growth in the range of 1.75 percent to 2.75 percent. From 2010 to 2015, the economy grew at an average annual rate of 2.6 percent.

Economists like Michael Gapen of Barclays expect gross domestic product to expand 2.5 percent in the current fourth quarter, and then advance about 2 percent in 2017.

“The consumer is fine, and there is evidence that the industrial side of the economy is stabilizing and the big drags from inventories and weak investment are abating,” said Mr. Gapen. “Manufacturing, trade and energy may no longer be significant headwinds, as they have been over the last year.”

The 1.1 percent growth rate from January to June this year was the slowest first half since 2011, and it was well below what economists expected when 2016 began.

Much of that weakness was a result of an inventory buildup on store shelves and in warehouses that has only slowly been worked off. The lingering effects on business investment from the collapse in the price of oil and other commodities have also dragged down the economy.

Many experts initially forecast another subdued performance in the third quarter, but estimates crept higher this week after a report on Wednesday showed better-than-expected exports and lower imports in September.

Unlike some recent periods, which showed uneven gains, the growth in the third quarter was broad-based, with most industries advancing steadily. For the second quarter in a row, trade was a net positive, adding nearly a full point to growth on a big jump in exports.

Consumer spending slowed from its barnburner pace earlier in the second quarter, but at 2.1 percent it was healthy enough to suggest that shoppers remained optimistic. Other sources of slack, like a drop in spending on residential construction, were more than made up by businesses as they restocked shelves and began investing again in the energy industry and elsewhere.

The recent rebound in oil prices could spur more economic activity among drillers and other energy producers in the months ahead.

The Wall Street Journal has more:

WASHINGTON—U.S. economic growth accelerated last quarter, easing fears of a near-term slowdown but doing little to change the trajectory of a long but weak expansion.

Gross domestic product, a broad measure of goods and services produced across the economy, expanded at an inflation- and seasonally adjusted 2.9% annual rate in the third quarter, the Commerce Department said Friday. That was stronger growth than the second quarter’s pace of 1.4%. Economists surveyed by The Wall Street Journal expected growth at a 2.5% pace for the July-to-September period.

Last quarter’s growth rate was the fastest recorded in two years.

The third-quarter acceleration largely reflected increased exports and a buildup of inventories, while consumer spending increased at a slower rate.

The latest data “do not point towards a new growth path but rather a strong rebound following one year of soggy growth,” said Joseph Brusuelas, chief economist at consulting firm RSM US.

Friday’s data also gave voters their last comprehensive look at the economy’s health before the November election.

The improvement could give Democratic presidential nominee Hillary Clinton more latitude to position herself as the candidate to continue Obama administration policies that have led to a long expansion. Still, the most recent gain comes in the weakest expansion in recent memory, a point Republican candidate Donald Trump makes frequently.

Since the recession ended in mid-2009 the economy has grown at roughly a 2% annual rate, making the current expansion the weakest on records back to 1949.

(…)

The latest data suggests the economy this year isn’t likely to top 2015’s 2.6% growth rate, the best annual reading of the expansion. The economy has failed to grow better than a 3% in any year since 2005, and many economists expect such growth will remain a rarity. The nonpartisan Congressional Budget Office projects GDP to grow at around 2% annually through 2026. Federal Reserve policy makers have pegged longer-run output gains at a 1.8% annual rate.

And while output advanced at a quicker rate last quarter, hiring was also stronger than in the second quarter. That could restrain improvement in worker productivity. Worker productivity has decreased for three straight quarters, through the midpoint of this year, and has been weak for much of the expansion. Productivity is a key ingredient in determining future growth in wages, prices and overall economic output.

Friday’s report showed inflation pressures eased during the summer.

The price index for personal-consumption expenditures rose at a 1.4% seasonally adjusted annual rate in the third quarter from the second. Consumer prices rose at a 2% rate during the second quarter. When excluding volatile food and energy costs, the price index increased at a 1.7% rate in the third quarter.

One caveat, of course, is that this is only an initial estimate and that we won’t have a completely clear picture of what the economy looked like during the third quarter until the second revision next month and the final revision at the end of the year. Since these revisions typically aren’t massive, though, it’s still likely that the figures for the third quarter will remain roughly where they are by the time the Commerce Department has completed its final estimate. What this means for the fourth quarter is unclear, of course, but the fact that economic activity during this period will include both the closing month of the Presidential campaign and the holiday season suggests that we may see another quarter of stronger growth than we saw during the first half of the year. Additionally, it’s unclear if the stronger economic growth reflected in these numbers is really having an impact for the average person, something that has been shown most of all in the jobs reports for the past several months. While June and July’s reports both showed solid growth in new jobs, August and September’s reports were anemic at best, and the average job growth of roughly  178,000 new jobs for months for the year is barely enough to cover increases in population and hardly constitutes robust growth in employment. Those same jobs reports have shown relatively weak growth in hours worked and average wages, suggesting little benefit for the average worker from the supposedly stronger economy.

The fact that this report is being released in the context of the closing two weeks of the Presidential campaign, of course, means that it is likely to be examined for what it means for the Presidential campaign. In all honesty, notwithstanding the fact that both this number and the unemployment figures that will be released next Friday are going to be closely examined by political pundits and ‘what it means’ will be a subject of debate between now and November 8th, I tend to doubt that most voters go into a voting booth saying to themselves “Well, GDP growth was X and Jobs Growth was Y, so I’m going to vote for (fill in the blank).” Instead, most voters will vote depending on what they feel like the economy is like based on their own circumstances. That’s one reason why voters in parts of the country where manufacturing used to be strong may be more responsive to some of the themes that Donald Trump has hit on during his campaign while people who are in parts of the country doing better than they were in 2008 are likely to be more responsive to Hillary Clinton’s arguments in favor of continuing with the policies of the Obama Administration. Additionally, at this point in the race the campaigns are, or at least should be, primarily concerned with making sure the people they know will support them to the polls than with trying to persuade voters to switch candidates. That’s not to say that today’s number isn’t important, or that a weak or strong jobs number next week won’t be important. Today’s report arguably robs Trump of at least part of his argument about a weak economy unless you believe his hard-to-believe promise that his plans would lead to consistent quarters of economic growth at 4% higher, something that we haven’t seen consistently since the 1990s and the 1980s respectively.

The other question, of course, is what this means for Federal Reserve policy going forward. The next meeting of the board is next week just prior to the election and, notwithstanding this report and whatever other data the Board may have access too, it’s anticipated that they will refrain from taking any action if only to avoid being seen as attempting to influence the election one way or the other. The next meeting after that, though, comes in December and it seems likely that they will raise rates at that time just as they did last December. Once again, even with some relatively strong economic data like this it’s hard to see exactly why it’s so important to raise rates when the data is only showing the slightest signs of strong growth and there are few, if any, signs of inflation returning. If anything else, such an increase risks slowing growth just when things are starting to turn around rather than waiting to see if the future data justifies such a move.

 

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. Ben Wolf says:

    In June and July we had strong fiscal flows. In latter August these flows sharply decelerated and didn’t recover until October after Congress passed a continuing resolution.

    It’s almost as though government spending has an effect on employment, output and incomes.

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  2. SenyorDave says:

    as an October surprise:

    The FBI will investigate whether additional classified material is contained in emails sent using Hillary Clinton’s private email server while she was secretary of state, FBI director James Comey informed Congressional leaders Friday.

    The announcement appears to restart the FBI’s probe of Clinton’s server, less than two weeks before the presidential election, an explosive development that could shape the campaign’s final days.

    So a vague note of more investigation 11 days before the election. It just convince me that no Democrat president should ever appoint a lifelong Republican to an important position.

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  3. Loviatar says:

    @SenyorDave:

    It just convince me that no Democrat president should ever appoint a lifelong Republican to an important position.

    As I’ve been saying for years and have been castigated for by others here; if you still call yourself a Republican at this time in American political history you are no better than the scum who troll the Brietbart sites.

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  4. Gustopher says:

    OT — Are you working on something related to the Bundy verdict? I’m curious as to the view of someone trained in the law who isn’t just trying to score points for his team.

    I am perplexed by the verdict. I would have expected nullification to take the form of a couple of jurors refusing to convict, rather than the entire jury, so I wonder what happened.

    (Also wondering if my friends and I can take over a federal park… I’m thinking the FDR house, next fall, protest while the leaves are changing colors, and then end the protest once they fall)

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  5. gVOR08 says:

    @SenyorDave: Yeah. This whole saga does seem to cloud Comey’s rep as a non-partisan straight shooter. That said, so far the story is only that some more email surfaced and Comey has tasked some people with reviewing them for any relevance, He doesn’t seem to have made a public statement, just a note to the Senate Judiciary committee, which for all I know is procedurally required. James had seemed to be getting more open minded about this, but now Republicans will celebrate another round of being convinced that this time there’s a pony in this pile of horse stuff. Hundred and twelfth times the charm, or something.

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  6. gVOR08 says:

    @Gustopher: Yeah. But community pressure can be intimidating. Started to smell like nullification a few days ago. There was a story that the jury complained to the judge that they couldn’t agree because of one intransigent hold out juror. The judge interviewed the individual, decided said juror discussed the case reasonably and understood the facts, and sent the person back in. Reasonable and in command of the facts may not have sat well with the rest of the jury. There really are a lot of people who’s heads are stuck up the CEC bizarro world.

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  7. Just 'nutha ig'rant cracker says:

    @Ben Wolf: Nah…that can’t be right. Didn’t one of those mid-last century German economic guys say that all government spending leads to serfdom and poverty?

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  8. al-Ameda says:

    @Ben Wolf:

    It’s almost as though government spending has an effect on employment, output and incomes.

    I see what you did there …

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  9. al-Ameda says:

    @gVOR08:

    Started to smell like nullification a few days ago. There was a story that the jury complained to the judge that they couldn’t agree because of one intransigent hold out juror. The judge interviewed the individual, decided said juror discussed the case reasonably and understood the facts, and sent the person back in. Reasonable and in command of the facts may not have sat well with the rest of the jury. There really are a lot of people who’s heads are stuck up the CEC bizarro world.

    Can you imagine if the group that took over the park was a Black Lives Matter off-shoot?
    There probably wouldn’t be any juror nullification going on.

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  10. Just 'nutha ig'rant cracker says:

    @Gustopher: My local paper–Longview, WA (near PDX)–working from a news service noted that the acquittal was for “conspiracy to prevent federal employees from doing their jobs. If that was the best that the prosecutors could come up with for a charge, I’m not surprised at the acquittal. Conspiracy is difficult to prove.

    As to your plan, IANAL, but I would say go ahead as long as the people who go with you have plausible deniability as to the issue of conspiracy (i.e, “I just heard about it and came along; I didn’t plan nuthin”).

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  11. Mikey says:

    @al-Ameda:

    Can you imagine if the group that took over the park was a Black Lives Matter off-shoot?
    There probably wouldn’t be any juror nullification going on.

    Much more likely the members of the group itself would have been nullified…

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  12. Just 'nutha ig'rant cracker says:

    @gVOR08 Doesn’t the law of averages dictate that there should be a pony in one eventually?:

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  13. gVOR08 says:

    @Just ‘nutha ig’rant cracker: I’m sure Nate Silver or Sam Wang could explain the statistics involved in great detail, but I believe if you apply Bayesian methods, i.e. you assume past performance is some indication of future results – no.

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  14. Ben Wolf says:

    @Just ‘nutha ig’rant cracker: Friedrich Verdon, I believe.

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  15. Ben Wolf says:

    @Just ‘nutha ig’rant cracker: Also Ludwig von Mataconis.

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  16. dxq says:

    @Just ‘nutha ig’rant cracker: The “Law of Averages” is a fallacy about probability.

    (I know it’s a joke, it’s just weird to math teachers how people bring up that term.)

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  17. dxq says:

    This is like the OJ Verdict for Rural White People.

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  18. stonetools says:

    Seems to me that the economic recovery kickstarted by the Obama stimulus is still chugging right along. Of course, Doug has to put in a paragraph saying that no, the economic recovery actually isn’t happening, despite all the evidence to the contrary, but he is an economic conservative, and so he has to poor-mouth what looks like a successful economic recovery engineered by the application of standard Keynesian economics ( It would be an even better recovery if there had been more fiscal stimulus, but there were these saboteurs called Republicans…).
    Doug does concede to reality by noting that if the Fed raises rates, that might hurt the economy. Now,strictly speaking, the Austrian guys Doug follows believe that the Fed should raise interest rates, but then those guys also believed that QE would kindle galloping inflation(which even Doug admits ain’t happening). Sadly, if you follow conservative economic dogma, nothing has made sense since summer 2008, when the economic collapse the economic conservatives didn’t predict happened.Since then, they have been wrong at every point.
    In any case, the Fed is not going to raise rates just before the election. They know better than to do what the other Fed (the FBI) did, which is to do anything whatsoever before an election.

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  19. Avid sportman says:

    @stonetools: Did you read anything in the GDP report beyond the headline numbers?

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