Economic Snapshot | Budget, Taxes, and Public Investment

GDP Picture: October 28, 2005

October 28, 2005

GDP report shows savings rate negative for first time since quarterly data collected

The Bureau of Economic Analysis (BEA) reported today that real gross domestic product (GDP) increased at an annual rate of 3.8% in the third quarter of 2005, up from a 3.3% growth rate in the second quarter. Final sales (a better barometer of growth in demand for U.S. output) grew 4.4% in the third quarter, down from 5.6% in the previous quarter.

The most striking finding in this report is that the personal savings rate was negative in the third quarter (-1.1%), the only negative savings rate on record since quarterly data were first made available in 1947. Real personal outlays were up 3.6%, while real personal disposable income fell by -0.9%. Part of the income slowdown can be attributed to recent hurricanes (Katrina and Rita), which reduced rental income and proprietors’ income (both are recorded in the BEA report net of property damage). This BEA report, however, does not include personal income data from September, and, given the huge job dislocation caused by the hurricanes, the September data on income will likely look even worse.

The strong growth in consumption contributed 2.73% to GDP this quarter, by far the largest component. Investment added 0.93%, with equipment and software investment continuing a year of strong growth by accounting for 0.69% of GDP growth.

Further possible effects of the hurricanes can be seen in the spread between the price index for personal consumption expenditures (PCE) and the PCE index minus food and energy costs (i.e., the “core” rate of inflation). The overall “market-based” PCE price index was up 3.9%, while the core rate of this measure was up only 1.2%. This provides strong evidence that potential inflation pressures facing the U.S. economy stem from energy prices and cannot be usefully addressed with further interest-rate tightening from the Federal Reserve. The core rate, which the Fed’s interest rate tools can address, is actually quite low by historical standards, arguing strongly that the Fed’s interest rate increases should come to a stop.

The year-over-year rate of inflation in energy services reached its highest quarterly rate since 1980, driving home the point that inflationary pressures stem almost exclusively from the energy sector. There is little doubt that households’ living standards are suffering from these high energy-driven inflation rates. Unfortunately, energy costs cannot be profitably addressed through Federal Reserve policy, and raising rates in response to them will only make the economic circumstances of American families even worse.

Inflation rate for energy services, 1960-present

As for trade, a very small decline in that deficit added 0.08% to GDP this quarter. This is the second consecutive positive contribution trade flows have made to GDP, although it is well below last quarter’s 1.11% contribution. These data could plausibly signal that the dollar’s decline over the past three years is finally paying off in terms of closer trade balance. However, goods imports were actually up this quarter (1.1%), while service imports were down 5.8%. It is not clear that this is the pattern one would expect if these movements were dollar-driven; goods imports are generally assumed to be more sensitive to long-run exchange rate movements.

Other notable features of today’s BEA report include a large rebound for motor-vehicle output, which added 0.48% to GDP this quarter after adding essentially nothing in the previous quarter. Additionally, federal government expenditures added 0.53% to GDP this quarter, with defense expenditures accounting for almost all of this (0.47%).

By EPI economist L. Josh Bivens

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The Economic Policy Institute GDP PICTURE is published quarterly upon release of the Bureau of Economic Analysis’ quarterly GDP report.

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