October 29, 2005
New GDP data and recession probabilities
The Bureau of Economic Analysis yesterday released its advance estimates for the third quarter, reporting real GDP grew at an annual rate of 3.8%.
As noted by William Polley, of particular importance is the fact that inventory drawdown again made a negative contribution to third quarter growth, as it had in the second quarter. Real final sales were actually up 4.4% for the third quarter. This is quite good news, because the likelihood of future restocking should sustain fourth-quarter GDP growth even if final sales turn weak. On the other hand, exports and nonresidential investment made smaller contributions than they had in the second quarter, with purchases by consumers and the government picking up the slack. From the perspective of providing the foundation for future economic growth and progress on the trade deficit, we would have preferred to see investment and exports lead the way.
Inflation between 2004:Q3 and 2005:Q3 came in at 2.9% according to the implicit GDP deflator, compared with a 4.7% inflation rate implied by the most recent release of the consumer price index. If the GDP deflator turns out to have underestimated inflation, that means the Commerce Department would have overstated the growth of real GDP.
The new data led to a very slight increase in the recession probability index for 2005:Q2 to 4.8%. The latest value of the index can be interpreted as the probability that the economy was beginning an economic recession in the second quarter of 2005. Like the business cycle dates assigned by the National Bureau of Economic Research, this is a backward-looking index, describing where the economy appears to have been in 2005:Q2, rather than a forward-looking prediction of where it will be at the end of the year. This marks the eighth consecutive quarter that the index has remained below 5%.
BizzyBlog notes that this is the first time since 1986 that we've seen a 2-1/2 year stretch of uninterrupted quarterly real GDP growth over 3%. Others finding cheer in the latest statistics include Angry Bear and Macroblog, while Economist's View and Big Picture voiced some misgivings. VoluntaryXchange, who tolerates no grade inflation when it comes to GDP, gives 2005:Q3 a grade of "B".
For my part, the real final sales figures were stronger than I was expecting, so I'm throwing my hat in with the optimists on this one. If this was a "B", then that's a grade of which a parent should be proud at this point.
Posted by James Hamilton at October 29, 2005 12:39 PMdigg this | reddit
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Tracked on October 30, 2005 10:15 PM
As the other Angrybear, I also took delight in the fact that sales grew even faster than production. Alas - the sum of consumption and government purchases grew in pace with production so we did not see a material rise in the national savings rate.
Posted by: pgl at October 29, 2005 01:41 PM
The decline in non-residentail fixed investment argues against a windfalls profit tax and a gasoline tax. Energy is getting ready for a huge investment surge - refineries, oil and gas drilling, pipelines, nuclear power plants, coal mines.
Why was there no change in imports in QII and QIII? One would expect that higher crude prices would push this up.
Posted by: Joseph Somsel at October 29, 2005 03:30 PM
Great point about low inventories, especially going into the holidays on the retail side.
Posted by: Tom Blumer at October 29, 2005 08:45 PM
As a person working in mfg... ignore the 'restocking' issue. Inventory draw-down only effects imported goods... this is because the lead-time to resupply from Asia is quite significant... on the order of a month or more as opposed to days & weeks for domestic suppliers. Even custom builds can be done in days now - we do it all the time.
None of the domestics I work for carry appreciable inventory if they have any control... nor do their customers. And with domestic plant utilization as low as it has been there is no reason they can't make-to-order as needed just-in-time. There are acceptions but few now and will be fewer in the future - believe me.
If we build inventory then somebody screwed up and probably get fired.
Posted by: dryfly at October 30, 2005 08:26 AM