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GDP Rises to 3.1% in Final Q3 Estimate, But the Main Drivers Won’t Last

The economy grew at a faster rate than expected in the third quarter, according to the final revision on GDP released today. GDP increased at a relatively healthy 3.1% clip in Q3, a step up from the 1.3% increase in the final revision in Q2. Both figures are annualized. The Bureau of Economic Analysis explains how they arrived at this figure.

The acceleration in real GDP in the third quarter primarily reflected upturns in private inventory investment and in federal government spending, a downturn in imports, an upturn in state and local government spending, and an acceleration in residential fixed investment that were partly offset by a downturn in nonresidential fixed investment and a deceleration in exports.

It’s that uptick in both private inventory and government spending that actually troubles people. Because those are two areas where what goes up must come down. Government spending, which is set on an annual basis, seemed to cluster in Q3, but overall it has contributed negatively to growth since mid-2010. It’s not going to stay elevated like that even for another quarter; budget authorization wouldn’t allow it. Similarly, building up private inventory in one quarter will lead to stagnancy in the next, simply because businesses won’t restock until their inventory gets bought down a bit.

So if you think that those two areas will revert to the mean, you have a rebuilding of state and local government, which is no longer creating anti-stimulus. And you have the housing recovery, which remains a small percentage of overall GDP. Meanwhile exports are down, trade still contributes negatively to GDP, overall fiscal policy has been a drag, and further business investment is up in the air. There are reasons to believe that GDP will continue at a 2% pace, but not at 3% necessarily, especially depending on what happens with the fiscal slope.

But corporate profits are up so we’re in good shape.

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David Dayen

David Dayen