Government claims U.S. GDP rose in September

NEW YORK — The first, or advance, estimate of third-quarter gross domestic product indicated that the economy rose a robust 3.5 percent at an annual rate. This was slightly above market expectations of a 3.2 percent increase and represented the first increase in five quarters, including a 6.4 percent drop in the first quarter and a 0.7 percent decline in the second.

Gross domestic product (GDP) is a figure that measures growth in a nation’s economy based on consumer consumption, business investment and government spending.

The report encouragingly showed stronger-than-expected spending in a number of key expenditure areas that was tempered by a slightly more aggressive drawdown in inventories. For example, consumer spending rose a very strong 3.4 percent following a 0.9 percent drop in the second quarter. The increase was largely powered ahead the 22.3 percent rise in durables consumption in the quarter reflecting the impact of the cash-for-clunker rebates. The increase in this component added 1.5 percentage points to the overall quarterly increase in GDP. Gains in non-durable and services consumption were up by a much more modest 2 percent and 1.2 percent, respectively.

Also showing greater-than-expected strength was the 23.4 percent surge in residential investment. This brought to an end to 14 consecutive quarters of decline in this expenditure area. Investment in equipment and software rose by a relatively modest 1.1 percent, although this followed six quarters of decline. Inventories were reduced by a sizeable $130.8 billion, which represented some easing from a $160.2 billion drawdown in the second quarter.

“Annualized growth in the core PCE deflator, the key inflation measure in the GDP report, moderated as expected to 1.4 percent from 2 percent in the second quarter,” said Paul Ferley, assistant chief economist with RBC Economics Research. “The return to positive GDP growth after four quarters of decline is encouraging. As well, the strength reflected the return to positive growth by a number of key expenditure areas with inventories continuing to be drawn down. The lower level of inventories implies that there will be a greater need for production going forward as demand continues to trend higher.

“However, much of the strength in third-quarter consumer spending reflected the impact of the cash-for-clunker rebates, which sent motor vehicle sales significantly higher. With those rebates ending in September, the Fed is expected to keep monetary conditions very accommodative to help sustain demand,” said Ferley. “The absence of upward inflation pressures in today’s report provides further justification for the Fed funds rate to remain very low between 0.0 percent to 0.25 percent. Our forecast assumes that the Fed funds rate will not be raised until the fourth quarter of next year.”

“The expansion in third quarter GDP shows we have clearly begun to emerge from the trough,” said Bart van Ark, chief economist with The Conference Board. “But there’s still a long way to go, and we still don’t know enough about the sustainability of these recovery signals. The comparatively good third quarter news is largely driven by temporary factors like an uptick in consumer spending – notably through the U.S. government’s “cash for clunkers” car sales subsidy program – as well as an easing in inventory rundowns.

“The fourth quarter could bring even faster easing in inventory rundowns that accounts for all GDP growth, said van Ark. “We forecast 3.1 percent,” he explained. ”Consumer spending will fall flat during the holiday season, and exports will recover more slowly than in the third quarter. Any modest uptick in investments in equipment and software will most likely be offset by continued declines in commercial real estate.

“A less powerful inventory boost with no positive offsetting contributors may well limit GDP growth to 1 percent in early 2010,” said van Ark. “We forecast growth to improve only moderately, to around 2 percent, by the middle of 2010. The savings rate will remain relatively high at 4.5 to 5 percent of disposable income, dampening improvements in real consumer spending, investment and trade.”

SOURCES: The Conference Board and RBC Economics Research press releases

Greg Gerber

Greg Gerber

A journalist who has covered the recreation vehicle industry since January 2000, Greg Gerber founded RV Daily Report on April Fool's Day in 2009. He also serves as the editor of the publication and website. As an Eagle Scout, he has enjoyed camping for decades and has visited every state except Hawaii. A DODO -- Dad of Daughters Only -- to three young women, he has two grandchildren as well. He currently splits his time between Wisconsin, Texas and Arizona. Greg can be reached at editor@rvdailyreport.com.

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