Friday, October 29, 2010

GDP grew 2.0% in 3rd quarter, Federal spending up 8.8%

In the last piece of major economic news to be released before the crucial 2010 midterm elections, the Bureau of Economic Analysis says that the US economy grew at the glacial pace of 2.0% in the quarter between July 1 and September 30:

Real gross domestic product -- the output of goods and services produced by labor and propertylocated in the United States -- increased at an annual rate of 2.0 percent in the third quarter of 2010,(that is, from the second quarter to the third quarter), according to the "advance" estimate released bythe Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent.

The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3).The "second" estimate for the third quarter, based on more complete data, will be released on November 23, 2010.

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

The small acceleration in real GDP in the third quarter primarily reflected a sharp deceleration inimports and accelerations in private inventory investment and in PCE that were partly offset by adownturn in residential fixed investment and decelerations in nonresidential fixed investment and inexports.

Real federal government consumption expenditures and gross investment increased 8.8 percentin the third quarter, compared with an increase of 9.1 percent in the second. National defense increased8.5 percent, compared with an increase of 7.4 percent. Nondefense increased 9.6 percent, comparedwith an increase of 12.8 percent. Real state and local government consumption expenditures and gross investment decreased 0.2 percent, in contrast to an increase of 0.6 percent.

Real nonresidential fixed investment increased 9.7 percent in the third quarter, compared with anincrease of 17.2 percent in the second. Nonresidential structures increased 3.9 percent, in contrast to adecrease of 0.5 percent. Equipment and software increased 12.0 percent, compared with an increase of24.8 percent. Real residential fixed investment decreased 29.1 percent, in contrast to an increase of 25.7percent.

Though the 2.0% figure is mostly in line with analyst estimates, it still indicates that the economy is not growing robustly enough to stimulate job creation or change the Fed’s mind about the need for quantitative easing—a monetary policy move that risks inflation and further erodes the dollar in foreign exchange markets.

Two key pieces of data in today’s release:

Residential investment, one of the best leading indicators of expected growth, fell by an eye-popping 29% and federal expenditures increased by nearly 9%.  This means that government spending is the primary reason for the GDP growth.  The private sector is still struggling and is not likely to liven up anytime soon.  Meanwhile, the federal government continues to spend at nearly a double-digit pace, using money that must be borrowed and increasing the federal debt.

This pace is absolutely unsustainable.


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