This morning the Bureau of Economic Analysis issued its 3rd estimate of 3rd quarter GDP, revising it downward once again. Its “advance estimate,” published in October, was that real GDP grew at an annual rate of 3.5%. Last month, that was revised down to 2.8%. This morning it was cut again, to 2.2%.
However, if we remove stimulus spending from the equation to see what’s really happening in the underlying economy, we find that chained GDP (expressed in constant 2005 dollars) fell in the 3rd quarter at an annual rate of 1.4%. Stimulus spending added $113.2 billion to the economy in the 3rd quarter – an annualized rate of stimulus spending of $453 billion. It’s important to understand what’s happening in the underlying economy because the stimulus spending will end soon, probably in early 2011.
But GDP is the whole pie. What’s really important is the slice of pie that each American gets. When population growth is factored into the equation (and again, with stimulus spending factored out), we find that the underlying chained GDP per capita actually continued to decline in the 3rd quarter at an annual rate of 5.5%, falling from $41,270 per person to $40,704. That’s better than the 9.0% rate of decline in the 2nd quarter, but a decline nonetheless. And it’s the lowest level in 5-1/2 years. Clearly, if the stimulus spending were stopped at this point, the economy would immediately slip back into recession.
It’ll be interesting to see what happens in the 4th quarter next month. 3rd quarter GDP was goosed by the cash-for-clunkers program and by a lot of restocking following many months of inventory depletion by businesses. That restocking rate is likely to slow, and auto sales fell back into a funk once the cash-for-clunkers program ended.
The point is that the stimulus spending is helping a little, but it’s doing a poor job of boosting the underlying economy in any meaningful way. We’re still waiting for Obama to begin addressing our trade imbalance as he had promised. Until that happens, we can expect to keep muddling along with high unemployment.