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3rd Quarter GDP Grew at a 3.4% Rate Because Inventories Grew at a 31.9% Rate

Summary:
The Third Estimate of our 3rd Quarter GDP from the Bureau of Economic Analysis indicated that our real output of goods and services increased at a 3.4% annual rate in the quarter, revised from the 3.5% growth rate reported in the second estimate last month, as growth in personal consumption, fixed investment, and exports were revised lower than was previously reported even as the change in our inventories was a greater addition to GDP than in the 2nd estimate.  In current dollars, our third quarter GDP grew at a 4.91% annual rate, increasing from what would work out to be a ,411.9 billion a year output rate in the 2nd quarter to a ,658.2 billion annual rate in the 3rd quarter, with the headline 3.4% annualized rate of increase in real output arrived at after an annualized inflation

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The Third Estimate of our 3rd Quarter GDP from the Bureau of Economic Analysis indicated that our real output of goods and services increased at a 3.4% annual rate in the quarter, revised from the 3.5% growth rate reported in the second estimate last month, as growth in personal consumption, fixed investment, and exports were revised lower than was previously reported even as the change in our inventories was a greater addition to GDP than in the 2nd estimate.  In current dollars, our third quarter GDP grew at a 4.91% annual rate, increasing from what would work out to be a $20,411.9 billion a year output rate in the 2nd quarter to a $20,658.2 billion annual rate in the 3rd quarter, with the headline 3.4% annualized rate of increase in real output arrived at after an annualized inflation adjustment averaging 1.8%, aka the GDP deflator, was applied to the current dollar change.  The GDP deflator was previously reported at 1.7% and hence its revision accounts for the revision of GDP growth by itself, other revisions notwithstanding....

Recall that the GDP release reports all quarter over quarter percentage changes at an annual rate, which means that they're expressed as a change a bit over 4 times of that what actually occurred over the 3 month period, and that the prefix "real" is used to indicate that each change has been adjusted for inflation using price changes chained from 2012, and then that all percentage changes in this report are calculated from those 2012 dollar figures, which would be better thought of as representing quantity indexes than any reality based dollar amounts.  For our purposes, all the data that we'll use in reporting the changes here comes directly from the pdf for the 3rd estimate of 3rd quarter GDP, which is linked to on the BEA GDP landing page.  Specifically, we refer to table 1, which shows the real percentage change in each of the GDP components annually and quarterly since the 4th quarter of 2014; table 2, which shows the contribution of each of the components to the GDP figures for those months and years; table 3, which shows both the current dollar value and inflation adjusted value of each of the GDP components; and table 4, which shows the change in the price indexes for each of the GDP components.  The pdf for the 2nd quarter second estimate, which this estimate revises, is here...

Growth of real personal consumption expenditures (PCE), the largest component of GDP, was revised from the 3.6% growth rate reported last month to a 3.5% rate in this 3rd estimate.  That growth rate figure was arrived at by deflating the 5.14% growth rate in the dollar amount of consumer spending with the PCE price index, which indicated consumer inflation increased at a 1.6% annual rate in the 3rd quarter, which was revised from the 1.5% PCE inflation rate reported a month ago.  Real personal consumption of durable goods grew at a 3.7% annual rate, revised from the 3.9% growth rate shown in the 2nd estimate, and added 0.26 percentage points to GDP, as an increase in real consumption of recreational goods and vehicles at a 9.0% rate accounted for more than two-thirds of the durables goods increase.  Real consumption of nondurable goods by individuals grew at a 4.6% annual rate, revised from the 5.3% rate reported in the 2nd estimate, and added 0.64 percentage points to the 3rd quarter economic growth rate, as lower consumption of energy goods was more than offset by greater consumption of food, clothing and other non-durables.  At the same time, consumption of services rose at a 3.2% annual rate, revised from the 3.1% growth rate reported last month, and added 1.47 percentage points to the final GDP tally, as real health care services accounted for more than a third of the growth in services.

Meanwhile, seasonally adjusted real gross private domestic investment grew at a 15.2% annual rate in the 3rd quarter, revised from the 15.1% growth reported last month, as real private fixed investment grew at a 1.1% rate, revised from the 1.4% growth shown in the second estimate, while inventories grew more than was previously estimated..  Investment in non-residential structures was revised to show contraction at a 3.4% rate, double the 1.7% contraction rate previously reported, while real investment in equipment was revised from growth at a rate of 3.5% to growth at a 3.4% rate, and the quarter's investment in intellectual property products was revised from growth at a 4.3% rate to growth at a 5.6% rate.  On the other hand, real residential investment was shown to be shrinking at a 3.6% annual rate, rather than the 2.6% contraction rate previously reported.  After those revisions, the decrease in investment in non-residential structures subtracted 0.11 percentage points from the 3rd quarter's growth rate, the increase in investment in equipment added 0.21 percentage points to the quarter's growth rate, lower residential investment subtracted 0.14 percentage points from GDP, while growth in investment in intellectual property added 0.25  percentage points to the growth rate of 3rd quarter GDP...

In addition, investment in real private inventories grew at a 31.9% annual rate, increasing by an inflation adjusted $89.8 billion in the 3rd quarter, revised from the previously reported $86.6 billion of real inventory growth...this came after inventories had shrunk at an inflation adjusted $36.8 billion rate in the 2nd quarter, and hence the quarter’s $126.6 billion increase in real inventory growth added 2.33 percentage points to the quarter's growth rate, revised from the 2.27 percentage point addition from inventory growth that was indicated in the second estimate.  However, since growth in inventories indicates that more of the goods produced during the quarter were left in warehouses or "sitting on the shelf”, their quarter over quarter increase by $126.6 billion meant that growth of real final sales of GDP was relatively smaller by that much, and hence real final sales of GDP only rose at a rounded 1.0% rate in the 3rd quarter, down from the real final sales growth rate of 5.4% in the 2nd quarter, when the decrease in inventory growth meant that growth in real final sales was greater than the real growth in GDP...

The previously reported decrease in real exports was revised even lower with this estimate, while the previously reported increase in real imports was revised a bit higher, and as a result the change in our net trade was a greater subtraction from GDP than was previously reported.  Our real exports shrunk at a 4.9% rate rather than the 4.4% rate reported in the second estimate, and since exports are added to GDP because they are part of our production that was not consumed or added to investment in our country, their shrinkage conversely subtracted 0.62 percentage points from the 3rd quarter's growth rate, revised from the 0.55 percentage point subtraction shown in the previous report. Meanwhile, the previously reported 9.2% increase in our real imports was revised to a 9.3% increase, and since imports are subtracted from GDP because they represent either consumption or investment that was not produced here, their increase subtracted 1.37 percentage points to 3rd quarter GDP, rather than the 1.36 percentage point subtraction shown last month.. Thus, our deteriorating trade balance subtracted a total of 1.99 percentage points from 3rd quarter GDP, rather than the 1.91 percentage point subtraction that had been indicated by the second estimate…

Finally, the entire government sector grew at a 2.6% rate, unrevised from the previous report, as growth of federal government consumption and investment was unchanged from the second estimate, as was growth of real state & local government consumption and investment.  Real federal government consumption and investment was seen to have grown at a 3.5% rate from the 2nd quarter in this estimate, unrevised from the growth rate shown in the second estimate, as real federal outlays for defense grew at a 4.9% rate and added 0.18 percentage points to 3rd quarter GDP, unrevised from the contribution shown previously, while all other federal consumption and investment grew at a slightly revised 1.6% rate but still added 0.04 percentage points to 3rd quarter GDP.  Meanwhile, real state and local consumption and investment grew at a 2.0% rate in the quarter, which was also the same growth rate reported in the 2nd estimate, and added 0.22 more percentage points to 3rd quarter GDP.  Note that government outlays for social insurance are not included in this GDP component; rather, they are included within personal consumption expenditures only when such funds are spent on goods or services, indicating an increase in the output of those goods or services...

(Note: the above was excerpted from my weekly economic synopsis at Marketwatch 666)

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