"Hooray!"
That about sums up the ecstatic reaction from mainstream media newsrooms and Wall Street trading floors following today's GDP report.
-
Business Insider: GDP crushes estimates
- WSJ: U.S. Economy Roars Back, Grew 2.9% in Third Quarter
- Barron's: Third Quarter GDP Climbs at 2.9% Rate, Better than Expected
- MarketWatch: GDP hits 2.9% in biggest gain in two years
There's more to the story.
Sure, third quarter GDP growth came in at 2.9% on a quarter-over-quarter basis. But that number is highly misleading for a number of reasons. It fails to capture the slowdown in consumer spending as well as the flawed nature of reading too much into this headline number.
A brief reminder before we get into that. Here's the basic formula for how GDP is calculated: GDP = Consumption + Private Domestic Investment + Government Expenditure + Net Exports
Let's look at each of those components, breaking down their contribution to the 2.9% reported in the third quarter:
Consumption: +1.47%
+
Investment: +0.52%
+
Net Exports: +0.83%
+
Government: +0.09% =
GDP: 2.9%
Now, HERE's what you need to know:
- Consumption, which makes up 70% of the U.S. economy, was nearly cut in half from 2.88% reported in the second quarter to 1.47% today.
- Inventories, it's buried within "Private Domestic Investment," and it had a huge swing. It contributed 0.61 basis points (bps) to GDP versus -116bps in the second quarter. (Note: Companies building inventories – the goods not sold by a company in a given quarter – is not necessarily a net positive for economic growth, especially if there is no demand to absorb these products now sitting on the shelves.)
- Net Exports, the difference between the goods companies export minus imports, came in at +83 bps and contributed a whopping 29% of the total GDP figure (up from 13% of total growth in the prior quarter).
In short, it was an anomalous quarter for inventories and net exports. Meanwhile, the halving on U.S. consumption? That is deeply disconcerting.
Remember too, that 2.9% number is calculated on a sequential basis. That simply means it compares the second quarter to the third and derives a percentage change over that period. Reading too much into this number is inherently misleading. It doesn't capture the longer-term picture of the U.S. economy.
The more important measure is the year-over-year growth in GDP, which was 1.5% in the third quarter. By this measure, the peak in GDP is already in. Year-over-year GDP growth has consistently fallen from 3.3% in March 2015 to 1.5% today. That means U.S. economic growth has been slowing for the past 20 months.
Where do we go from here?
The convergence to 0% economic growth doesn't happen overnight. But that's where we're headed. So, while the myopic media and Wall Street can tout one misleading economic reading, we'll continue to dig into the data. All is not well beneath the surface of this GDP report.
We fully expect U.S. economic growth to continue its slow slide to 0%.
