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US GDP Tumbles in the Third Quarter

Posted by Joseph Trevisani on Oct 29, 2015 1:44:39 PM

American economic growth fell by more than half as the inventory build that had fueled expansion in the second quarter reversed and firms adjusted their investments to meet lower consumer spending and government expenditures declined.

Gross domestic product, the sum of all goods and services produced in the country, increased at an annual rate of 1.5 percent in the third quarter, reported the Commerce Department in Washington. It was a sharp drop from the 3.9 percent pace in the prior three months and just below the 1.6 percent median forecast from the Bloomberg survey of economists.

This leaves the U.S expanding at a 2 percent rate for the first nine months of the year, the slowest annual growth since 1.3 percent in 2012. The U.S grew 2.5 percent last year, 2.4 percent in 2013 and has averaged 2.1 percent since the end of the recession in June 2009.

The three main pillars U.S. economic activity, consumer spending, business investment and government expenditures all shifted into lower gear in the third quarter.  

Consumer spending which accounts for about 70 percent of the economy, rose 3.2 percent from July to September, percent  an 11 percent decline from the 3.6 percent  seasonally adjusted annual pace in the second quarter and missing the 3.3 percent forecast. The biggest individual component of the  spending increase was healthcare. 

 Real final sales a measure of economic activity which excludes inventory build by businesses, climbed at a 3.0 percent pace in the third quarter, almost double the overall GDP rate, compared with a 3.9 percent in the second.  

Business investment declined at a 5.6 percent annual rate in the third quarter, the first decline since the beginning of 2014. Quarterly changes were more modest, with business spending rising 2.1 percent from July to September as opposed to a 4.1 percent gain from April to June. Expenses on new equipment rose at a 5.3 percent annual rate, the fastest in year.  Costs of research and development however ebbed to a 1.8 percent increase, the smallest gain in two years. 

Finally, government expenditures slowed to a 1.7 percent annual increase, down from the 2.6 percent surge in the prior three months. Federal government spending rose just 0.2 percent, as a 2.8 percent increase in civilian outlays was offset by a 1.4 percent decline in military procurements. State and local government budget increases made up the balance of the overall government picture.

A widespread reduction in business inventories as firms sold off stockpiles, accumulated in the first and second quarters faster than replacement, subtracted 1.4 percent from GDP according to the Commerce Department. International trade had negligible effect on U.S. domestic activity as it is calculated by the Bureau of Economic Analysis, a division of the Commerce Department. Exports, which add to GDP rose 1.9 percent in the third quarter despite the stronger dollar, and imports, which subtract climbed 1.8 percent, leaving an insignificant negative 0.03 percent difference.

Consumers may be hard- pressed to boost spending as the holiday season approaches. Job creation cooled considerably in the third quarter, non-farm payrolls averaged 167,000 a month, down from 213,000 in the first half of the year.  Wages were essentially flat in the third quarter, gaining just 2.2 percent over the year, 0.1 percent higher than in the first six months.  Despite the 5.1 percent unemployment rate, the lowest in more than seven years, more working age American are out of the workforce than at any time in history. 

The gross domestic product figures are subject to three revisions, twice this year at one month intervals, as more complete economic information becomes available to the government and once in 2016 in the annual review.   First and second quarter numbers gained substantially under revision from their intimal estimates

The Federal Reserve yesterday characterized U.S. economic growth as '"moderate" in its policy statement, while giving the impression that a hike in the Fed Funds rates for the first time in seven years, is still possible at the December meeting. 

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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