Did Third-Quarter GDP Surge at the Expense of Fourth-Quarter Production?
Economic output grew more than expected in the third quarter, according to a revised estimate released by the Bureau of Economic Analysis on Friday. Real gross domestic product — “the output of goods and services produced by labor and property located in the United States” — increased at an annual rate of 4.1 percent on the quarter, an increase from the prior estimate of 3.6 percent growth. The revision was due primarily to larger personal consumption expenditures and fixed non-residential investment.
“The acceleration in real GDP growth in the third quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and accelerations in state and local government spending and in PCE that were partly offset by a deceleration in exports,” reports the Bureau of Economic Analysis.
Markets edged higher following the good news, but there are some underwhelming aspects of the GDP report worth pointing out. Perhaps chief among them is strong inventory growth, which contributes positively to third-quarter numbers but could foreshadow a decline in fourth-quarter production. The change in real private inventories added 1.67 percentage points to the third-quarter GDP, compared to 0.41 percentage points in the second quarter. Excluding private inventory changes, third-quarter GDP increased just 2.43 percent.
Total business sales — the combined dollar value of trade sales and manufacturers’ shipments — increased a seasonally adjusted 0.5 percent to $1.3 trillion in September, according to data released by the U.S. Census Bureau earlier in December. This compares against an inventory build of 0.7 percent to $1.7 trillion, growth that exceeded economist expectations of 0.3 percent but is still not quite high enough to materially affect the total business inventories-to-sales ratio, which remained unchanged at 1.29.
Economists and market participants can use the inventory-to-sales ratio to determine whether production will increase or decrease in the coming months. Production generally slows as inventories rise and firms need to work down the build, and production increases as inventory declines as firms work to avoid shortages.
It is somewhat relieving to see that the price index for gross domestic purchases remained unchanged at +1.8 percent in the third quarter and at +1.5 percent, excluding food and energy. Personal consumption expenditures also increased 2 percent in the third quarter, signaling at least a modicum of domestic demand.