Third Quarter GDP

Thu, 30 Oct 2008 12:50:04 +0000

The Bureau of Economic Analysis released the advance estimate of third quarter GDP this morning. The headline is:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent.

[...]

The decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software
that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

This is the last consequential piece of macroeconomic news before the election, and it doesn't do much for either side. The headline number is not good, but it is not nearly as bad as the media frenzy on economic news since mid-September would suggest. The changes in the composition are largely what we would expect based on economic policy this year -- consumption and housing investment should decline -- and government spending and net exports should increase.

For those looking to declare a recession, the second appearance of negative growth in a quarter, however slight, may be the last piece of the puzzle that was needed. Growth rates over the last 4 quarters have been -0.2, 0.9, 2.8, and -0.3, for an annual rate of 0.8 percent. That's nothing spectacular, but it's not a decline. I would still wait for another full quarter of data to come in (i.e., until March 2009) before declaring a recession.

I don't think that the NBER recession dating committee will rush to make the call. This is the advance estimate -- it gets revised twice over the remainder of the year and is subject to more fundamental revision on a five-year cycle. Having to un-declare the recession if the economy rebounds more quickly than anticipated or if the data get revised would undermine the committee's credibility.