According to today’s data release from the Bureau of Economic Analysis, gross domestic product—the broadest measure of the nation’s economic activity—grew at an annualized rate of 2.5 percent in the third quarter of 2011, an increase from the previous quarter’s 1.3 percent growth rate and the largest quarterly rate of growth since the third quarter of 2010. However, this rate of growth, if it is sustained over the next year, is likely insufficient to lower today’s 9.1 percent unemployment rate. Worse, it’s unclear that the trend growth of GDP is even as high as this—since the third quarter of 2010, GDP has grown by just 1.6 percent.
Today’s report also marks the first time that the level of economic output has surpassed its pre-recession (fourth quarter of 2007) peak. Since quarterly data began being tracked in 1947, the U.S. economy has never taken this long to regain pre-recession output levels.
Final demand—a measure of output growth that strips out the influence of inventory investment (a particularly volatile component of GDP)—grew at a 3.6 percent rate in the quarter, as the rate of change in private inventories fell. While final demand has outperformed overall GDP growth in many recent quarters, this indicator also does not suggest a fundamentally healthy economy. Growth in final demand over the past year has been just 2.4 percent—still too low to lower the unemployment rate.
Growth in personal consumption expenditures—the single largest component of GDP—essentially matched the overall growth rate and contributed 1.7 percentage points to the quarter’s growth rate.
Business investment in equipment and software rose at a 17.4 percent rate in the quarter, its ninth straight quarterly increase and the largest increase since the second quarter of 2010. Business investment in structures rose for the fifth time in the last six quarters, suggesting that this component of business investment may have finally turned the corner after being depressed by a large inventory of corporate real estate produced by overbuilding before the recession.
Residential investment grew slightly (at a 2.4 percent rate) for the second straight quarter, the first consecutive quarterly increase since the last six months of 2005. While this is encouraging, because the growth rates have been slow, and because this component of GDP shrank so much in the aftermath of the housing bubble, it is hard to see this sector making a major contribution to GDP growth for some time.
Net exports contributed 0.2 percentage points to the overall growth rate, the second straight positive quarterly contribution and the first two consecutive quarters of positive contribution since the first six months of 2009—during the recession. A key potential danger in the coming year is that very slow growth in the economies of major trading partners in Europe and Japan could be transmitted to the U.S. economy through slowing exports. So far, this does not seem to have provided a drag on overall growth, and this is a positive sign. Still, it seems likely that trade could be a major headwind in the coming year.
While the business investment and trade numbers are slightly more encouraging than in recent reports, the data on personal disposable income are not. Real disposable personal income fell at a 1.7 percent rate in the third quarter. This decline was led by a fall in real compensation and wages—the first such real decline since the last quarter of 2010. It should be noted that this real decline was not driven by a one-time price spike. The deflator for personal consumption expenditures (PCE) rose at an annualized rate of 2.4 percent in the quarter—down substantially from the growth rate of the previous six months.
The decline in disposable personal income meant that the rise in consumer spending in the quarter came largely from a 1 percentage point decline in the personal savings rate, which fell from 5.1 percent to 4.1 percent. If there is any lesson to be taken from the last three years, it is that economic growth resting on a foundation of ever-lower personal savings rates is inherently fragile. This is a prime concern raised by today’s report.
Lastly, the report shows that inflationary pressures remain tame. The one-year rise in the market-based PCE deflator excluding food and energy—a closely watched indicator of potential future inflation—rose only 1.6 percent. This low inflation rate, combined with only a 1.6 percent GDP growth rate over the same period (third quarter 2010 to third quarter 2011), argues that this remains an economy plagued by weak demand. Measures to boost demand are by far the most effective tools to bring the economy back to health.