Economic growth accelerates during third quarter

12/01/1998


According to preliminary estimates from the Commerce Department's Bureau of Economic Analysis, real gross domestic product (GDP) -- the total output of goods and services produced in the United States -- increased at a seasonally-adjusted annualized rate of 3.3% during the third quarter of this year. This figure was a much stronger rate of growth than most economic forecasters had been looking for, particularly following the subdued 1.8% gain in the nation's GDP during the second quarter of the year.

However, the numbers weren't quite as strong as they appeared on the surface. When an unexpected surge in the amount of new product that was added to business inventories during the quarter is subtracted out, the "final sales" measure of GDP rose by a solid, but more restrained, 2.3%. This amount is more in line with what most consider to be the real underlying strength of the nation's economy, given continued uncertainty about the international economic situation. The current assumption is that this inventory surge won't be duplicated during the next several quarters, and that third-quarter inventory accumulation may in fact "rob" future quarters of gains that could have accrued if companies had been more prudent in their inventory building over the July-September period. If, however, demand proves to be stronger in the months ahead than most are currently anticipating, the third quarter buildup of inventory will be seen as less troublesome.

Looking at the underlying details of the GDP report, it's clear that overall consumer and business demand did cool between the second and third quarters of this year. Total consumer spending, which had grown at a well-above-trend 6.1% annual rate during the first half of this year, increased at a more modest 3.9% in the final quarter (although this rate was still much better than annual growth recorded in 1995-1997). And business fixed investment in new plant and equipment -- widely-acknowledged to be the single most important driving force behind this long period of economic expansion -- actually declined at a 1% annualized rate during the third quarter. Exports also continued as a drag on overall GDP growth during the third quarter (just as they had during the year's first two quarters), falling at a 2.9% annualized rate after averaging double-digit annual growth during the past 3 yr.

The third quarter GDP numbers will be revised twice before the government considers them to be final, so some of the specifics will change, and overall GDP growth may turn out to be slightly higher or slightly lower than 3.3%. Whatever, the final third-quarter estimate ultimately looks like, however, it's likely that the fourth-quarter gain will be a notch or two below it --unless businesses surprise us again by investing still more in inventory.

Growth in GDP unexpectedly strong during July-September

(Seasonally-adjusted, annualized growth in GDP)

Q3/96 2.1%

Q4/96 4.2%

Q1/97 4.2%

Q2/97 4.0%

Q3/97 4.2%

Q4/97 3.0%

Q1/98 5.5%

Q2/98 1.8%

Q3/98 3.3%

Source: U.S. Commerce Department





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