A Little More Momentum in Q3 as GDP Increases by a Tepid 2%
- Real Gross Domestic Product increased by a 2.0 percent annualized rate in the third quarter of 2012.
- Consumer Expenditures added to headline GDP growth, gaining 2.0 percent in Q3.
- Nonresidential Fixed Investment declined at a 1.3 percent annual rate, pulled down by structures.
- Government Expenditures were strong, increasing at a 3.7 percent annualized rate in Q3.
- Inventories were a drag as farm inventories declined as a result of the summer drought.
There is good news and bad news in the advance estimate of third quarter 2012 GDP. The good news is that headline real GDP growth accelerated mildly from the weak 1.3 percent annualized rate of Q2, to a tepid 2.0 percent for Q3. Consumers did their part, increasing their spending at a moderate 2.0 percent rate, boosted by auto sales. The bad news is that business investment was very weak, declining at a 1.3 percent annualized rate for the quarter. In a low interest rate environment with at least moderate consumer spending and recovering housing markets why would business investment be so weak? A likely culprit is the ongoing sense of uncertainty about the economy due to both global macroeconomic conditions and to the approaching Fiscal Cliff. Within the broad category of nonresidential fixed investment, spending on structures declined at a 4.4 percent annual rate, the first quarterly decline since the first quarter of 2011. Weak job growth is a factor here as office-using employment has not absorbed much available space. The U.S. office vacancy has declined since the recession, but remains elevated by historical standards. In addition corporations are reducing the amount of floor space per employee, and that is reducing the positive impact of employment gains. However, there is hope for commercial construction. In New York City, the Hudson Yards project is moving forward and that may prove to be a bellwether. At $15 billion it represents the largest private project started since the Great Recession. In addition to declining investment in nonresidential structures in Q3, investment in equipment and software was unchanged for the quarter, well down from the double-digit growth of 2011. Trade was a small drag on Q3 GDP, as were inventories. The drought in the Midwest this summer caused a drawdown in farm inventories to the tune of $27 billion (nominal) in Q3. Government spending was a plus for GDP, up at an eye-catching 3.7 percent annual rate as federal defense spending accelerated. The combination of demobilization from Iraq and Afghanistan and perhaps some use-it-or-lose-it budgeting may have contributed to the surge in defense spending.
In sum, the Q3 GDP report shows an economy pulled in several directions at once. While some sectors of the U.S. economy are regaining lost vigor, namely housing, it would be premature to say that this is an economy on the mend. We would not see declining business investment in a healthy economy. The Fiscal Cliff remains a key threat to the health of the economy. Until that threat is removed, delayed, amended or at the very least, better understood, economic growth will fall short of potential.
Market Reaction: Equity markets are down, as are Treasury yields. Oil is down to $85.91/barrel. The dollar is losing value against the yen and the euro.
Click here for a PDF version of the Comerica Economic Alert: GDP 102612.