The Corner

A Good GDP Report, But . . .

The U.S. economy grew 3.5 percent at an annualized rate over the last three months, the Bureau of Economic Analysis announced this morning. That’s a strong number, especially following 4.6 percent growth in the second quarter, although both of them follow an exceptionally bad first quarter, when the economy shrunk at a 2.1 percent annual rate.

Taking that into account, there’s no reason for great celebration: Because these two quarters are to some extent rebounding from the first, this year has not been an especially impressive one for economic growth. (It has been better than most of the recovery in job creation, but wages have barely risen.) The third quarter did beat expectations — most analysts had expected GDP growth to be just under 3 percent, though of course these numbers are subject to substantial revision.

And in some ways, the quarter was even better than it looks. One of the major components of gross domestic product is private-sector inventories, which swell and shrink over time for various not terribly meaningful reasons, and when you take out inventories, according to the BEA, growth was 4.2 percent (though of course inventories have added growth in other months).

On the flip side, one big boost to GDP was government spending. Public-sector spending made the biggest contribution to GDP in the last quarter that it has since the implementation of the stimulus in the second quarter of 2009, increasing GDP growth by 0.8 percentage points (chart via ZeroHedge):

That was in large part thanks to increased federal defense spending — it rose 16 percent on an annualized basis this quarter (thanks ISIS). But state and local governments, with their revenue streams finally recovering, are starting to spend more too. The unexpected nature of that federal boost explains some of why GDP growth was higher than analysts expected.

There’s reason to believe, unfortunately, that this strong growth is going to slow, and not just because we’re still making up for last winter’s slow activity: Exports were a big driver of growth this quarter, and there are problems on that horizon. China and Europe’s economies seem to be slowing, and the dollar, driven by worries about global security and European debt, is strengthening. Provided the right policies, the U.S. economy can grow on its own, but those issues will decrease growth at the margins.

The GDP report also measures inflation over the last quarter, and it’s a miserly 1.3 percent. That’s by a different measure (“personal consumption expenditures”) than the one you usually hear cited (the consumer price index), but it’s the number the Federal Reserve looks at when targeting 2 percent inflation. The Fed ended its quantitative-easing bond-buying program yesterday but has pledged to keep rates low for a significant amount of time — some critics would argue that that’s an inadequate response to the fact that inflation has run noticeably below their set target.

Patrick Brennan was a senior communications official at the Department of Health and Human Services during the Trump administration and is former opinion editor of National Review Online.


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