The Corner

Why the Good GDP News Is Good, but Not Great

The federal government announced today that the U.S. economy did better than initially thought in the third quarter — it grew at a 3.6 percent clip rather than 2.8 percent, as originally estimated. That makes it one of the best quarters of the recovery, and it’s a good rate, period. If the U.S. economy grew at 3.6 percent for the next decade, our federal debt burden would actually lessen substantially, and our long-term fiscal situation would be a lot rosier (people would also be much better off, of course). But that’s not expected to happen: The federal government’s current economic projections assume that the U.S. economy will eventually get back to consistently growing in the 3 percent range, but that won’t be till about 2015, and it won’t last more than a few years (the Baby Boomers’ retiring and slower birthrates will slow growth). More important in the short term, this news, combined with consistently low jobless claims (leaving aside the shutdown spike), a strong October jobs report, and positive indicators from various industry surveys, means the Federal Reserve may start thinking sooner rather than later about tapering its quantitative-easing/bond-buying program. We’ll know more about that tomorrow, when we get the November jobs numbers, which will be less messy than October’s shutdown-affected data.

But for now, the 3.6 percent number is not as impressive as it sounds: It’s in large part due to a huge uptick in companies’ inventories of real products (called a “run up”). That activity added 1.68 percentage points to GDP growth (an annualized number) between July and September, equal to $116 billion worth of economic activity. In other words, companies produced $116 billion worth of goods more than they sold in those months — so when people buy those products in the fourth quarter, or whenever, the purchase won’t affect GDP as it would have if it had necessitated building a product on demand or replacing it in the inventory. 

This isn’t a lasting bump, and in fact, it probably means we’ll see a “draw down” when we get the numbers for the fourth quarter of this year. But it could be either a good or bad sign: There are two kinds of run-ups, intended and unintended. Intended means that businesses expect better future sales, so they start building up inventories (especially when that’s cheaper, before the economy picks up, etc.); unintended means that consumer demand didn’t meet expectations in that quarter, so now businesses are left in a bit of a lurch and expectations were too high. This may be more of an intended one. Indicators of business confidence look pretty good, and consumer demand didn’t fall way short — spending increased at an annual rate of 1.4 percent in the quarter, compared to 1.8 percent the quarter before. So the fourth quarter number may not be terribly impressive because this one was so good, but the message for the economy overall is optimistic.

One final point is that, even if this quarter’s growth was a little illusory, it was respectable, as has been economic growth throughout this year (jobs growth was lackluster for a time, but seems to be improving). And that’s notable in and of itself: In 2013, the economy was hit by huge tax increases on investment and payrolls, and saw federal discretionary spending slowed somewhat significantly. Yet the economy has done relatively well this year, much better than Keynesian doomsayers predicted. That may be because the effects of fiscal changes (tax increases and spending cuts) are overexaggerated in mainstream Keynesian models, because the Fed’s bond-buying program has worked much better and propped up expectations better than we thought (see Jim Pethokoukis’s take on this), or something else is going on. The fourth quarter GDP numbers and November’s employment numbers will also tell us a little more about another piece of conventional wisdom: that the government shutdown and debt-ceiling fight was a real problem for the economy, whether by increasing uncertainty or cutting government’s contribution to the economy (the latter effect is almost definitely negligible). October’s jobs numbers suggested it wasn’t, and the Fed doesn’t think so either. We shall see.

Patrick BrennanPatrick Brennan is a writer and policy analyst based in Washington, D.C. He was Director of Digital Content for Marco Rubio's presidential campaign, writing op-eds, policy content, and leading the ...

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