Third Quarter GDP Growth Slows to 1.5%

Real gross domestic product slowed to an annual rate of 1.5 percent in the third quarter, the Bureau of Economic Analysis said in its first (advance) estimate yesterday.  

In the second quarter, real GDP increased by 3.9 percent.

The advance estimate is based on source data that are incomplete or subject to further revision; historically, subsequent estimates can vary greatly from the advance estimate.

BEA said the increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures, state and local government spending, nonresidential fixed investment, exports, and residential fixed investment, partly offset by negative contributions from private inventory investment. Imports, a subtraction in the calculation of GDP, increased.

The report said deceleration in real GDP in the third quarter primarily reflected a downturn in private inventory investment and decelerations in exports, in nonresidential fixed investment, in PCE, in state and local government spending and in residential fixed investment, partly offset by a deceleration in imports.

Anika Khan, senior economist with Wells Fargo Securities, Charlotte, N.C., said slower pace of economic activity was due to a large detraction in inventories. Real final sales, which excludes inventories, rose 3.0 percent. She said details of the GDP report prove more promising.

“At first blush, the slower pace is disconcerting especially given the Federal Reserve will carefully weigh every data point until the December Federal Open Market Committee meeting,” Khan said. “That said, the lackluster pace of economic activity in the third quarter is not the final read on the U.S. economy. The Fed will have two additional nonfarm payroll reports to gauge overall labor market activity, which we expect will continue to show improvement.”
On the inflation front, Khan said, no big change appeared to influence the underlying story. The core PCE deflator, closely watched by the Federal Reserve, rose to 1.3 percent during the quarter.

“Much of the slower pace in real GDP growth was due to the volatile inventory component,” Khan said, noting inventories shaved an “eye-popping” 1.44 percentage points from the headline, which is the largest detraction since late 2012. “The swing in inventories is not all that surprising given the sharp accumulation that occurred in the first half of the year,” she said. “Net exports and structure investment were also weak during the quarter, while government purchases added to real GDP growth.”

Khan noted some positive news: real private final sales to domestic purchasers, which excludes inventories and trade, rose to a 3.2 percent pace following a 3.9 percent increase in the second quarter. “On the back of improving labor market conditions and stronger purchasing power due to the decline in retail gasoline prices, consumer spending has been a bright spot,” she said. “Despite some uncertainty that was evident in the latest consumer confidence report, consumers are in a much better position at this stage of the business cycle. Household balance sheets are healthy and revolving credit is picking up.”

Khan added that residential investment continues to boost overall economic activity. “The pickup in household formations since the beginning of the year will continue to support the housing market recovery,” she said. “Although new home sales were weak during the month, housing starts, existing home sales and builder sentiment are likely painting the more accurate picture.”