Moderate Growth Mid-Year

It’s difficult to get excited about data that is so old. So today’s third, and final, version of third quarter GDP is notable mainly as a benchmark. It is highly likely a high water mark for 2012 and perhaps even for 2013. All the evidence suggests we have been in a gradual slowdown since mid-year. Indeed many of our major indices hit their recent peaks in July and have faltered since.

Nonetheless it is worth taking a look at the numbers.

Overall GDP at a 3.1% annual rate in the third quarter. Here are the details:

• Personal Consumption grew at an annual rate of 1.5%, adding 1.12% to the total;
• Private Investment grew at a 6.6% annual rate, adding 0.85% to the total;
• Net Trade added 0.38% to the total;
• Government Spending grew at an annual rate of 3.9%, adding 0.75% to the total.

So, as you can see the economy expanded across the board and was not overly reliant on any one sector, but within the data there are signs of weakness.

The key drivers of consumption were durable goods and health care spending. It is a quirk of GDP accounting that the decline in gasoline prices actually was a slight drag. Most of us would argue that lower gas prices are a good thing, but from a broader perspective this is not so. Less spending is, of course, less demand, and that slows things down. The cash freed up appears to have gone elsewhere though, particularly into motor and recreational vehicle sales, both of which bounced back from a fairly weak second quarter.

Even though overall private investment grew fairly well there are some worrying signs deeper in the data. All that growth came in the form of inventory accumulation and the continued recovery in residential construction. Business investment sagged and acted as a significant dampening agent on growth. The stock explanation being tossed around is that business is worried about the fiscal cliff. I interpret this as a statement about the economy next year. Business sees budget cuts and tax increases for what they are: austerity measures that will slow demand. So expressing concerns over the budget negotiations is not necessarily to support fiscal tightening. It is simply a statement about prospective sales. If sales look weak then no one will invest. That is not rocket science, but quite often analysts look for politically based explanations of business behavior rather than more straightforward business activity explanations.

It is not the ‘fiscal cliff’ that concerns business. It is the consequences of the negotiation that causes the most worry.

Meanwhile trade helped out GDP more strongly than in most recent quarters. This is another quirk. Exports were not as good as the two prior quarters, but imports declined. The quirk is that import levels are tightly tied to overall activity. So a decline in imports suggests that the economy is slowing down not accelerating.

Finally, government spending also contains some mixed news. State and local government spending  actually rose after eleven straight quarters of retrenchment. The gain was minimal and based on a few construction projects, but at least it reverses the deep austerity measures that have dragged the economy down for a long time. At the Federal level practically all the growth in spending came in the form of defense contracts. Non-defense spending grew at a snail’s pace. The problem with this is that defense spending is notoriously chunky and bounces about quarter to quarter. So that bulge in the third quarter is likely to presage a drop in the fourth.

So what to make of all this?

Not a whole lot. We can look back an a pretty good summer, and that’s about it. At this point the data is really a historic artifact. So much has happened since that it doesn’t help too much with our understanding of where we will be in 2013. All the indications are that the economy has sagged somewhat. Growth will be much slower in the next couple of quarters because there is still no impetus within the US and the global economy is stuttering even more badly than we are.

And nor can we look for any policy help. Monetary policy is fully extended and not much use with interest rates as they are. And there is no direction to fiscal policy, indeed all the signs are that it will turn out to be a negative force next year. We are paying a huge social cost for an accumulation of policy errors, some dating back four decades. I am not overly optimistic we will correct them. So stagnation will continue.