Friday, December 23, 2016

Q3 GDP Growth Now 3.5%!

Popular Economics Weekly

The third-quarter lived up to its early expectations, rising with each new revision to an inflation-adjusted 3.5 percent annualized rate for the best showing in two years, said the Commerce Department. The consumer was the main engine in the quarter, spending at a 3.0 percent rate (up from 2.7 percent in the prior estimate) on top of the second quarter's very strong 4.3 percent rate.

In fact, real gross domestic income (GDI), another measure of economic growth, increased 4.8 percent in the third quarter, compared with an increase of 0.7 percent in the second. The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 4.1 percent in the third quarter, compared with an increase of 1.1 percent in the second (table 1).

This is perhaps a more accurate measure of growth since it combines both domestic income and spending, which shows that it may be difficult to implement President-elect Trump’s $1B infrastructure plan. The economy is already fully employed and it will be difficult to goose GDP growth higher, unless exports and hence global demand increases as well.

The increase in real GDP in the third quarter primarily reflected positive contributions from PCE, exports, private inventory investment, nonresidential fixed investment, and federal government spending that were partly offset by negative contributions from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

More good news is that the GDP price index increased just 1.5 percent, vs. 2.0 percent in Q2, and increased 1.7 percent, excluding energy and food prices. This means very little inflation is occurring, even with the increased economic activity. It’s mainly the still cheap energy prices that hold inflation down, needless to say, due mostly to depressed worldwide demand for commodities, such gas and oil products.

But growth could reach or exceed 4 percent in the fourth-quarter, though it might be held down by a reversal for exports (stronger dollar) and perhaps by less strength in consumer spending, which isn't quite tracking as strongly as the third quarter proved to be, says Econoday.

Lastly, the Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for November 2016. In the past month, the indexes increased in 43 states, decreased in three, and remained stable in four, for a one-month diffusion index of 80, as indicated in the enclosed map.

The green states are those with the highest growth rates, and pink/red states have the least growth. In fact, Alaska, New Mexico, Maine, West Virginia and Alabama economies are still contracting. Growth is flat in Michigan and Louisiana. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average), which closely mimic Gross Domestic growth.

This is one more sign that most, but not all, of the U.S. has recovered from the Great Recession.

Harlan Green © 2016

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