Third quarter GDP growth came in at 2.0% (2.5% on the first read). That is well below consensus expectations of 2.5% growth. That is still much better than as the 1.3% pace in the second quarter, and five times as fast as the anemic 0.4% pace in the first quarter.
Further, the quality of the growth was very good, as the change in inventories was a significant drag on growth. Almost all of the downward revision to overall GDP growth is due to the bigger drag from inventory investment. Absent the much slower growth in inventories in the third quarter relative to the second, growth would have come in at 3.55% (3.58% the first time around). In other words, except for the inventory issue, the third quarter growth rate, would have on balance been revised down by only 3 basis points, not 50.
While the level of growth was disappointing, the quality of the growth was excellent. Clearly, those who were declaring that we had already entered a new recession a few weeks ago were just flat out wrong.
I think it is best for investors to focus on the contributions each sector of the economy made to that overall growth rate of 2.00% (2.50% the first read), rather than the growth rates of each sector. That is because the different parts of the economy are of vastly different sizes, and a relatively small percentage change in a big part of the economy, such as Personal Consumption Expenditures (PCE) can have a much bigger impact on the overall growth rate of the economy than a big change in a small part of the economy, like Federal Non-Defense spending (excluding transfer payments).
Some small sectors of the economy though do have a tendency to be very volatile, and thus “punch above their weight class” when it comes to how fast the overall economy is growing. Take a look at the path of GDP growth over the last 30 years. The pace of growth in the third quarter was right about in the middle of the historical experience.
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