Q3 GDP: Continued (Sporadic) Recovery

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report

The BEA announced in the advance estimate that real GDP increased at a s.a.a.r. of 3.5% for 2014 Q3. The estimate is down over a percentage point from the 4.6% growth rate in the second quarter, although it is still in line with the average pace of growth during the current recovery of 2.16%.

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The growth in GDP was led by an increase of 1.8% in personal consumption expenditures which also cooled off from its 2.5% rate in the second quarter. Other components contributing to the increase were exports (7.8%), nonresidential fixed investment (5.5%), and both federal (10.0%) and state and local (1.3%) government spending. The increase in federal defense spending (16.0%) was the largest since 2009 Q2. Defense spending and inventories have a habit of reversing in subsequent quarters so it is not necessarily a robust improvement in the outlook.

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Real personal income increased at an annual rate of 3.2%, up slightly from its second quarter growth rate of 2.9%.

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A day before the BEA release, the FOMC released this statement on October 29. The FOMC ended Q3, but kept the possibility that if things deteriorated they could drag it out again. The statement was guarded when talking about recent conditions (highlighted text is ours):

…economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow.

 

The most significant early signal of improvements in the labor market came from the employment cost index ( abroad measure that includes benefits) which, after months of staying flat, showed a sharp spike up in recent months.  Average hourly earnings are also moving higher in recent months.  Fed watchers will be watching this closely in the coming months to see if it portends increasing price pressure elsewhere in the economy. Nevertheless, the most likely outcome for the near future is that inflation will continue to be below target and interest rates will continue at their current level.

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