By Paul Gomme and Peter Rupert
Many people have recently been debating whether, or to what extent, the US has fallen into recession territory. The latest GDP report shows strong overall growth…with some weak spots of course. Here is a detailed look at the report.
GDP and Components
On Thursday, October 27, the Bureau of Economic Analysis (BEA) released the advance estimate of Q3 GDP. After seasonal adjustment, real GDP increased 0.6% over from the previous quarter. “Real” means the quantity of goods and services, adjusting for the effects of price inflation. However, headlines touted a 2.6% growth rate for the U.S. economy in the third quarter. The difference is that the BEA (among others) expresses the 0.6% quarter-to-quarter growth rate as an annual rate, as if the economy grew 0.6% per quarter for four consecutive quarters. This solid real GDP growth comes on the heels of two consecutive quarters of decline – what some characterize as constituting a recession.
As many learned in their economics classes, there are several major components of output demand: consumption, investment, government spending and net exports, i.e., Y = C + I + G + (X-M). This identity is useful in identifying areas of strengths and weaknesses in the economy. To start, real consumption grew 1.4% (annualized) in the third quarter, down from a 2.0% growth rate in the second quarter.
Next, gross private domestic investment fell 8.5% – an improvement over the 14.1% decline in the second quarter. A well-known business cycle regularity is that investment is more volatile than consumption. This fact is borne out in the figures above and below, although the scaling of these figures, along with the extreme effects around the onset of the pandemic, partially masks this fact. Both residential and nonresidential structures investment have fallen for six consecutive quarters with the largest decline over that period coming in the third quarter, falling 26.4% and 15.3%, respectively.
Government spending grew 2.4% in the third quarter, after five consecutive quarters of decline. Keep in mind that government spending relates to expenditures on goods and services, and includes both “consumption” and “investment” components. Also, government spending excludes transfer payments that constitute a major component of government expenditures, but, for National Income and Product Accounts purposes, is spent by other entities, and so is not considered part of government spending.
Exports rose 14.4% with the export of goods rising 17.2% and services up 8.3%. Imports fell 6.9%. However, in the output identity above, imports are subtracted from output and so the decline in imports contributes positively to output. Since 2021, the U.S. dollar has strengthened against its trading partners. This strengthening of the dollar implies that imports have become cheaper for the U.S. while its exports are more expensive for its trading partners. In this light, the recent numbers for imports and exports presumably reflect considerations apart from relative price movements, such as changes in incomes. However, if foreigners wish to consume more US goods and services they must acquire US dollars and so both imports and the dollar can rise together. Over longer periods the relationship would more likely yield a negative correlation.
The output identity is also useful because it shows how output growth can be decomposed into contributions made by its major expenditure components. For example, the contribution of consumption is given by the growth of consumption weighted by consumption’s share of output. This calculation tells us that consumption contributed 1.0 percentage point towards the overall 2.6% growth in output. Large positive contributions were also recorded by exports (1.8 percentage points) and imports (1.4 percentage points). Meanwhile, investment dragged output down by -1.6 percentage points.
Final sales of domestically produced goods rose 3.3%. Disposable personal income grew 1.7%.
In terms of prices, the GDP deflator rose 4.1% in Q3 following a Q2 increase of 9.0% and Q1 of 8.3%. The personal consumption expenditures price index (PCEPI) increased 4.2% in Q3 following a 7.3% rise in Q2 and a 7.5% increase in Q1. While the consumer price index (CPI) is the price index most people are familiar with, the Fed mainly dwells on the PCE price index. The differences between the CPI and PCEPI are explained here…feel free to read if you like to know things like the CPI is a Laspeyres index while the PCEPI uses a Fisher-ideal index, among other things.
Employment Situation: Establishment Survey
The Bureau of Labor Statistics (BLS) announced that October employment rose 261,000 according to the Establishment Survey. August was revised down 23,000 while September was revised up 52,000. Employment gains were widespread with no major sectors showing any decline in employment. The private sector increased 233,000 and the largest single sector increase came in Services, rising 200,000. However, the 261k increase was the smallest since December of 2020.
Average weekly hours of work remained at 34.5 and average hourly earnings increased from $32.46 to $32.58. The year over year increase in nominal earnings is 4.72% so that inflation is still eating away at it and real earnings have actually fallen.
Employment Situation: Household Survey
The household survey showed that the number of employed individuals decreased 328,000, in stark contrast to the 261,000 increase in payroll employment. The employment to population ratio fell from 60.1 to 60.0.
The number of unemployed persons rose to 6,059,000 having increased by 306,000 over the past month, but there are still many more vacant jobs than those searching. The labor force fell by 22,000 with the participation rate declining from 62.3 to 62.2 and is still below the pre-pandemic reading. These changes led to an uptick in the unemployment rate from 3.49% to 3.68%.
